RBI MPC meet | 'Doves' or 'hawks'; who will put up a good show?

The monetary policy committee (MPC), which is the rate-setting panel of the Reserve Bank of India (RBI), is set to announce its decision on October 9 after a three-day meet. RBI Governor Shaktikanta Das will announce the decision of the panel at 10 AM. This time, the MPC meet gained even bigger attention as three out of the six members came on board at the last minute. Due to the delay in appointment, the MPC meet had to be postponed late last month.

Early this week, the government said it has filled three vacant seats by appointing Ashima Goyal, member, Prime Minister’s Economic Advisory Council (PMEAC); Shashanka Bhide, Senior Advisor, National Council for Applied Economic Research; and Jayanth Verma, Professor, Indian Institute of Management, Ahmedabad, to the RBI panel that sets interest rates.

Of the three, Goyal is seen as a ‘dove’ while the other two are in the ‘neutral’ camp. Other MPC members include deputy governor Micheal Patra and executive director Mridul Saggar, considered to be ‘hawks’.

The big challenge before the MPC is to play the balancing act while making its policy choice. They are meeting at a time when growth is projected to contract steeply and inflation is high. Retail inflation has consistently stayed above the central bank’s comfort level for several months, hit by high food prices mainly. The MPC has an inflation band of plus or minus 4 percent to keep a watch on. Any reading above that, at a persistently elevated level, isn’t welcome. The last reading for August showed the CPI inflation print at 6.69 percent, according to data released by the National Statistical Office (NSO) on September 14. The consumer price index (CPI)-based inflation rate for July has been revised to 6.73 percent from 6.93 percent. This is the fifth month in a row that retail inflation has stayed above the RBI’s comfort level at the upper band of 6 percent.

The growth scenario, on the other side, is alarming. Most forecasts predict a contraction of 5-9 percent for this fiscal. The latest warning has come from the World Bank which said the GDP contraction could be 9.6 percent in this fiscal. Among the new faces on the MPC, Goyal is a supporter of deeper rate cuts and a pro-growth stance—at least going by her past comments and writings. Das and his colleagues at the RBI have so far taken a balanced stance, have expressed their willingness to act when needed but not entirely ignoring the inflation risks. Most economists expect that the MPC outcome tomorrow will be a status-quo on rates and continuation of the ‘accommodative’ stance.

But more than the policy outcome, the language of the policy document will be key to watch. The estimates on GDP growth (which has been missing for a while) and the inflation outlook will be something the markets will be waiting for.

Having said that, the MPC has cut the policy rates by 250 bps since February 2019. In the August review, Das had given a very clear hint on what he thinks about future rate approach. “Although there is headroom for further monetary policy action, at this juncture it is important to keep our arsenal dry and use it judiciously," Das said, adding, "I also feel that we should wait for some more time for the cumulative 250 basis points reduction in policy rate since February 2019 to seep into the financial system and further reduce interest rates and spreads."

In its August meet, the MPC left the repo rate unchanged at 4 percent and reverse repo rate at 3.35 percent. Since February 2019, the MPC has cut repo rate by a steep 250 basis points. One bps is one-hundredth of a percentage point.

Similarly, Michael Patra's comments in the last MPC minutes require a closer look. Patra said, "If inflation persists above the upper tolerance band for one more quarter, monetary policy will be constrained by mandate to undertake remedial action, including an immediate and more than proportionate response to head off the build-up of inflation pressures and prevent it from getting generalized."

These comments suggest that the committee may not look at a rate cut anytime soon till the inflation concerns ease. The chances of a reversal in policy stance too cannot be ruled out if inflation continues to cause problems. The question is, can a slowdown-hit, COVID-ravaged economy withstand a tighter monetary policy? Can we afford rate hikes, if that happens, when growth is projected to contract as much as 9 percent in FY21? The answer is obvious.