MINUTES OF APRIL POLICY – SEPARATING “NOISE” FROM THE “SIGNAL”

By Ruma Dubey

When the credit policy was announced this month, the message which came across was very positive , almost like some misplaced, forced optimism. It all felt unreal – the inflation and growth trajectory.

And yesterday, when the minutes of the Monetary Policy Committee (MPC) was published, it was a relief to know that within, the two days meet and debate was more real. RBI might not be too worried about the inflation at the moment but at the same time, the minutes made it crystal clear that there was no rate cut on the agenda. If the 5^th April Credit Policy was very dovish, today’s minutes show a very hawkish outlook. Forget rate cut, we should actually brace ourselves for a rate hike.

Also what came forth from the minutes was that the divide between the one dissenting member and the rest of the MPC has only become deeper. In the previous two MPC meets – Feb and April, Michael Patra was the lone wolf, voting for a rate hike. A read through the minutes shows that he could soon be joined by another MPC member, Viral Acharya. Thus as of now, based on the minutes, two out of the six are “in” for a rate hike.

The six members of the MPC are - Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Viral V. Acharya, Dr. Urjit R. Patel and Dr. Michael Debabrata Patra.

And the minutes, publishes in detail the view of each of these six members.

 Dr. Chetan Ghate seemed more worried about growth and said, “My main concern in the last few reviews has been whether the ongoing cyclical recovery in growth will sustain, despite growing discomfort on the upside risks to the 4% inflation target in the medium-term.” He preferred to have a wait-and-watch stance at this juncture as the data evolves.

Dr.Pami Dua seemed more hawkish and he took cognizance of the fact that the Consumer Confidence Survey conducted by RBI in March 2018 presents a pessimistic outlook for General Economic Situation and Employment Scenario. This is supported by the languishing growth in the Economic Cycle Research Institute’s (ECRI) Indian Leading Index, a harbinger of future economic activity, indicating dull prospects for economic growth. Further, growth in ECRI’s 20-country composite Long Leading Index has eased, suggesting that global growth is likely to slow down. Dimming growth prospects at the global level are also indicated in the drop in the composite Purchasing Managers’ Indexes covering services and manufacturing for various economies, including the Euro area, the U.K., China and Japan, since the end of 2017, and more recently in the U.S.

Dr.Ravindra Dholakia too adopted a wait-and-watch attitude and expects inflation to be at or around the target rate of headline inflation 12 months down, not barring several uncertainties this forecast.

Dr.Urjit Patel is also of the wait-and-watch camp and he said, “Even as inflation has moderated in recent months, several upside risks to inflation persist. Hence, I would like to wait for more data and watch how various risks to inflation evolve, going forward.”

The only two who have a different tone and voice are Viral Acharya and Michael Patra.

Dr.Viral Acharya made two points which show that he could be join the dissenting voters list next time in June if rates are not hiked. He said, “my minutes of the February 2018 MPC meeting, I had flagged two reasons that had induced me to pause from voting to begin the process of “withdrawal of accommodation”: first, the possibility of US shale gas response softening the oil price outlook, and two, growth recovery in the economy still being nascent. Uncertainty on these fronts has now receded.”

With growth expected to be stable, Dr.Acharya said that he had moved substantially closer to switching from the neutral stance to beginning the process of withdrawal of accommodation, despite the softening of inflation in recent prints. He is the only one who has expressed concern over the mounting risk of fiscal slippages. He said that the lower inflation we see today is only account of the lower vegetables prices and this had nothing to do with supply management but more on account of seasonality.

Dr. Michael Patra said categorically, “I maintain my vote for a 25 basis points increase in the policy rate. Underlying macroeconomic developments impart some urgency to commencing the withdrawal of accommodation.”

The next MPC meet is scheduled for 6^th June and maybe that too will remain a status quo as monsoon would remain a decisive factor then, unless of course crude prices run ahead of all fundamentals. But yes, clearly, a rate hike is a certainty; the only thing we now wait for is the timing of that hike. It could be a 25 bps rate hike and psychologically is where it will hit the most.