Minutes of Monetary Policy CommitTee. ‘It’s best to wait and watch’

While unanimously voting for a status quo on the policy repo rate, members of the monetary policy committee (MPC) preferred a ‘wait-and-watch’ approach to ensure that previous policy repo rate cuts and fiscal policy actions work their way into the economy, as per the minutes of the MPC meeting released by the Reserve Bank of India on Thursday.

All six MPC members voted for the policy repo rate (the interest rate at which the RBI lends funds to banks to overcome short-term liquidity mismatches) to remain unchanged at 5.15 per cent and continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

The status quo , announced at the fifth bi-monthly monetary policy review on December 5, came in the face of conflicting pulls — slump in GDP growth and upturn in retail inflation.

Nothing is lost

Chetan Ghate, Professor, Indian Statistical Institute, observed that despite lacklustre growth and rising inflation, the monetary policy is in a good place right now.

“A large quantum of rate cuts has still not been transmitted, and the MPC loses nothing by waiting for a couple of months.

“...In October, some high frequency indicators have begun to contribute to a positive momentum in growth, suggesting that it is best to wait for a few months to see whether the slowdown has bottomed out or not,” said Ghate. He added that it is best to wait to see how the corporate tax cuts have impacted the economy.

Pami Dua, Director, Delhi School of Economics, noted that in the event of the monetary transmission expected to be realised in the near future and measures undertaken by the government to address the slowdown, there is merit in a wait-and-watch approach to see how these measures pan out and impact real economic activity, including investment, going forward.

Ravindra H Dholakia, former Professor, Indian Institute of Management, Ahmedabad, said the sharp spike in food inflation may continue for the next two to three months, driving the headline inflation above the mid-point target and closer to the upper bound of the flexible target range.

He felt that it is prudent to wait and watch out for clarity on growth-inflation dynamics and gain some more confidence at this juncture before taking a decisive action on the policy rate front. In the meantime, there is enough slack for the markets to adjust to the rate cuts already made, he added.

Accommodative stance

Michael Debabrata Patra, Executive Director, RBI, said arguably, the slump in real GDP growth warrants accommodative monetary policy actions and stance, whereas the upturn in headline inflation for the third month in succession after a quiescent phase of nine months calls for an opposite response or at least status quo until there is ground to infer that the food price spirals that are driving it are on the ebb.

He felt that with 135 basis points interest rate reductions and fiscal policy actions working their way into the economy, it is best to allow this pass-through and be ready to back signs of traction with resolute and calibrated policy actions.

Referring to the MPC cumulatively reducing the repo rate by 135 basis points, BP Kanungo, Deputy Governor, RBI, said the impact of this will gradually be felt on the real economy.

Need for clarity

“The current uptick in inflation driven by a sharp increase in food prices is expected to reverse. However, there exists considerable uncertainty on the food price trajectory, and the quantum of impact of unseasonal rains on kharif output would be known only early next year. The incoming data may also provide greater clarity on the growth outlook,” he said.

Shaktikanta Das, Governor, RBI, said there is a need for greater clarity as to how the overall food inflation path is going to evolve, as there is some uncertainty about the outlook of prices of certain non-vegetable food items such as cereals, pulses, milk and sugar.

Das elaborated it is also not clear at this stage as to how the recent increase in telecom charges will play out even as CPI inflation, excluding food and fuel, has moderated.

“The impact of past policy rate reductions on monetary transmission, however, is still unfolding. The impact of recent counter-cyclical measures taken by the Government is playing out.

“The budget is due for presentation in about two months and it will provide greater clarity on the measures the Government may initiate. It is imperative that monetary and fiscal policies work in close coordination,” the Governor said.

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