MPC: Speak up, Stand up and Stand out
Next week’s meeting of the monetary policy committee (MPC) takes place in meaningfully different global and domestic settings compared with the last meeting in early April. There are good reasons for the MPC to sound less hawkish, but there is little to justify a cut in the repo rate or shift in the neutral stance. The Reserve Bank of India (RBI) and the MPC need a rethink on transparency and communication if the six-member panel isn’t to be reduced to an item number that plays out bimonthly.
Externally, crude oil prices are lower than at the time of the last meeting. There has been limited positive impact of the recent extension of the Organization of the Petroleum Exporting Countries’ (Opec’s) production cut, and the Trump reflation trade has run its course. Investors are now debating whether the US Federal Reserve will tighten only once rather than twice.
Domestically, consumer price index (CPI) inflation, at 3% in April, was better than expected. The softening was broad-based though also partly flattered by a favourable base effect. It will soften further before turning upwards in the second half. Overall, its trajectory is likely to be slightly better than the official forecast.
The gross domestic product (GDP) data for 4Q FY17 disappointed as the demonetisation-related hit more than offset the likely boost from the revised industrial production and wholesale price index (WPI) data. Frankly India’s quarterly GDP data should be taken with several bags of salt. More relevant is that the FY17 growth of 7.1% was unchanged from the advance estimate. The temporary hit from demonetization is largely behind us; growth in FY18 will be marginally better.
The MPC will need to stay alert until there is sufficient confirmation about the monsoon outcome and the goods and services tax’s disruptive implementation. It will also continue to be mindful of any adverse impact on inflation from improving growth and still-sticky core inflation, and the challenge of achieving the ambitious inflation target of 4%.
The inflation outlook also needs to be assessed in the context of potential reflationary policies for the agriculture and rural sectors—these are likely in the run-up to the next general election. The discipline on minimum support prices will probably be relaxed though it probably won’t be irresponsible.
The MPC will maintain its neutral stance but there is enough for it to sound less hawkish. In its bid to gain credibility in achieving the challenging inflation target of 4%, the MPC wasn’t excited by inflation being lower by a whopping 1.4 percentage points relative to the forecast for 4Q FY17. A slightly better inflation outcome for 4Q FY18 compared with the official forecast is unlikely to prompt easing. As recovery strengthens and pricing power returns, the MPC will become more concerned about inflation, especially the core component, in the supply-constrained economy. It should avoid any adventurism, as it is unlikely to achieve its ambitious inflation target in a sustained manner over the next two years.
The forthcoming meeting is a good time for the MPC to clear the air on its definition of core inflation despite its legal mandate for headline consumer price index (CPI) inflation. The MPC/RBI must address the criticism that its preferred core measure (i.e. CPI ex-food and fuel) is incomplete as it excludes transportation, thereby overstating core inflation.
Communication by the MPC and the RBI needs to improve. The October rate cut, along with the dovish inflation outlook despite an upward revision in the inflation forecast, is shrouded in mystery. The rupee’s outsized appreciation finds no mention in the April minutes. The stepped-up hawkishness of the MPC is at odds with the RBI’s relaxed approach towards easy liquidity conditions.
Frankly, it isn’t clear if there is a gag order but the external MPC members remain mum in public. Even the RBI’s communication on growth and inflation outside the MPC meetings has become less frequent in recent months. Indeed, there is a preference for shorter post-policy briefings. Some stakeholders have even expressed concern over a perceived deterioration in quality.
In a highly regressive move beginning in October, the transcripts and recordings of the post-policy briefings with researchers are no longer being uploaded on the RBI’s website. No explanation has been offered. Curiously, and disappointingly, the financial press has self-servingly looked the other way. India is a focus globally and every investor or analyst is not in a convenient Asian time zone to dial into the live briefing. In the past, the transcripts and recordings of the call played a meaningful role in better understanding of the RBI’s thought process. Indeed, the RBI’s credibility was enhanced as there was greater—and freer—opportunity to ask questions. And answers were offered.
India’s MPC is like a silent movie that plays every two months, and the RBI is perhaps the only central bank whose communication has worsened in recent months after having made significant progress. Effective communication is a must for policy clarity, consistency and predictability. Indeed, curbing the opportunity and time for asking questions, and engineering diminished disclosure, don’t make for improved communication. The RBI should know better.
Rajeev Malik is a senior economist at CLSA, Singapore. These are his personal views.