Opinion Decoding the dissent within the MPC

In its December meeting, the monetary policy committee of the Reserve Bank of India had voted to raise the benchmark repo rate by 35 basis points. The MPC had retained its stance, choosing to remain focused on the withdrawal of accommodation. However, committee member Jayanth Varma voted against the rate hike. Varma, along with Ashima Goyal, also objected to the stance of the committee. As differences within the committee begin to sharpen, the minutes of that December meeting, released on Wednesday, not only provide an understanding of the considerations guiding individual MPC members, but also indicate the likely trajectory of monetary policy.

The minutes of the meeting reveal that several committee members continue to worry about price pressures in the economy despite the recent dip in inflation. Headline retail inflation declined to 5.88 per cent in November, falling below the upper threshold of the RBI’s inflation targeting framework. Much of the decline was due to falling food inflation — the consumer food price index fell to 4.67 per cent in November, down from 7.01 per cent in October. Worryingly, however, core inflation remained elevated, signaling continuing price pressures in the economy. RBI’s state of the economy report also acknowledges the risks, saying that “inflation may be slightly down, but it is certainly not out.” And that “if anything, it has broadened and become stubborn, especially at its core.” In his comments, RBI Governor Shaktikanta Das also noted the “persistence” in core inflation. However, Varma, while arguing that inflationary pressures are “easing”, points towards “heightened growth concerns” — this perhaps indicates a shift within the committee with greater emphasis now being placed by some on growth considerations. After all, the effects of a slowing global economy are already being felt across the Indian economy. India’s export growth has plummeted in recent months, as has industrial production. Domestic demand also appears to be slowing as seen through the recent import data.

Advertisement

Since May, the MPC has raised the repo rate by 225 basis points. While the size of the hike was lower in December, indicating perhaps that the end of the rate hike cycle is near, there continues to be uncertainty over the extent of tightening the RBI still envisages. Das has said that a “premature pause in monetary policy action would be a costly error at this juncture,” while Patra has noted that a “decisive decline in inflation over a series of monthly readings” needs to be seen before a shift. These comments only increase the possibility of another rate hike when the committee meets next in February. A pause thereafter cannot be ruled out.