MPC minutes: RBI officials, external members divided on state of India's growth

Shashanka Bhide, Ashima Goyal, and Jayanth Varma don’t seem to share the views of the RBI's representatives on the committee when it comes to India’s growth situation.

The Monetary Policy Committee (MPC) may have voted unanimously to leave the repo rate unchanged at 6.5 percent on April 6, but its six members are evenly divided when it comes to the assessment of the Indian economy's performance.

As per the minutes of the April 3-6 meeting of the rate-setting panel, released on April 20, the three representatives of the Reserve Bank of India (RBI) on the committee – Governor Shaktikanta Das, Deputy Governor Michael Patra, and Executive Director Rajiv Ranjan – are of the opinion that India's domestic growth is fairly strong and healthy.

Here are some excerpts of the minutes:

Shaktikanta Das: "…domestic growth impulses remained buoyant in Q4 FY23. Looking ahead, the thrust on infrastructure spending by the government would support investment activity. The drag from net external demand is moderating. Overall, the broadening of economic activity and the strength of the external sector have allowed us room to remain steadfastly focused on inflation."

Michael Patra: "The momentum of economic activity in India is broadening, and slack is being pulled in… In my view, the baseline projection for real GDP growth at 6.5 percent for 2023-24 will benefit from an upside from budgeted capital expenditure; this advantage should not, however, be frittered away by inflation."

Rajiv Ranjan: "…domestic growth momentum remains robust… new incoming information suggests that the growth outlook for 2023-24 has improved with investment revival likely to become more entrenched along with a lesser drag from external demand."

All fairly rosy, one could say, although it must be pointed out that Patra did warn there were signs high inflation was hurting private consumption and sales growth, which was consequently "hamstringing new investment".

External members' corner

On the other side are the three external members – Shashanka Bhide, Ashima Goyal, and Jayanth Varma. The three academics are not particularly happy about India's growth performance, going by the minutes of the latest meeting.

Shashanka Bhide: "The growth performance…points to both uneven growth across production sectors and subdued growth in the more recent quarters of FY23… The drag on India's exports – particularly goods exports – due to these adverse global demand conditions is…expected to prevail in FY23… The key concern on the growth front in the immediate future is the drag caused by the weak external demand conditions. The impact of any adverse weather conditions on Indian agriculture provides additional downside risk to the growth trajectory."

Ashima Goyal: "Although growth is resilient, there are signs of slowdown in some high frequency data… A further rise in real-interest rates is best avoided at present, since high real rates can trigger a non-linear switch to a low growth path."

Jayanth Varma: "On the growth front, early warning signs of a possible slowdown are visible to a greater extent than in February."

It must be added here that, just like Patra, from the RBI side, who sounded some caution on growth, Bhide, from the external members' side, did note high-frequency data suggested a "continuation of the present growth momentum".

Groupthink?

Clearly, the house is divided quite starkly. The RBI's optimism about growth has been apparent for some time now. In the March edition of the State of the Economy article, Patra and his co-authors wrote that they remained "optimistic about India, whatever the odds".

Admittedly, the article — published on March 21 – does not represent the views of the RBI but those o the authors, who think India can grow by 7 percent in 2023-24 if certain factors play out favourably.

At this point, it is worth pointing out that there are few takers even for the RBI's official growth forecast of 6.5 percent for the current financial year.

More worrying is the fact that the MPC is divided along orgnisational lines, with RBI officials in one camp and the external members in the other.

In an interview to Moneycontrol in December, Jayanth Varma had said perhaps the most important role played by the external members of the MPC is to "break the groupthink in monetary policy-making".

"We are not bound by the house view of the central bank. That hopefully provides room for other analysts to break from that groupthink. When we see that monetary policy is often slow to change course, that is a function of groupthink," Varma had said.

Whether groupthink or a genuine difference in views, it is telling that there is such disagreement on whether India's growth is a matter of concern or not.