BackMembers in MPC divided on pace of interest rate hikes
While all of them voted for an off-cycle policy rate hike in May, some felt that it was necessary to avoid stronger rate action going forward.
PremiumMUMBAI : One of the members of the Reserve Bank of India’s monetary policy committee pressed for an immediate repo rate hike of more than 100 basis points, while others favoured less aggressive rate action in future, minutes of the rate-setting panel’s last meeting showed. While all of them voted for an off-cycle policy rate hike in May, some felt that it was necessary to avoid stronger rate action going forward.
Jayanth R. Varma was the lone MPC member who said the committee needs to front-load the rate action by more than 100 basis points, with a 50 basis points hike in May itself. This is also the first instance where an MPC member revealed his expectation of rate trajectory, giving the market a peek into the MPC’s thinking.
RBI on 4 May raised the repo rate by 40 bps to 4.40% after an urgent meeting of the rate-setting panel, the first rate hike since the pandemic outbreak in 2020.
“It appears to me that more than 100 bps of rate increases need to be carried out very soon. The majority of the MPC is in favour of 40 bps for reasons which are not very clear to me. Whatever symbolic or psychological benefit there may be from keeping the hike below 50 bps is outweighed by the simplicity and clarity of moving in round multiples of 25 bps. Also, reducing the hike by 10 bps now would require an extra 10 bps hike at some point (and perhaps sooner rather than later). Nevertheless, I have thought it fit not to dissent on this issue as the optimal rate hike is not something that can be calculated with mathematical precision, and 40 bps is not materially different from 50 bps. I am thankful to the majority for not making my decision more difficult by choosing a 37.5 bps hike (exactly mid-way between 25 and 50)," Varma said.
However, MPC member Ashima Goyal said excessive interest rate hikes may not be necessary going forward, and an off-cycle rate hike in May would reduce the expectation of further hikes. She also suggested that government action on the supply side, including a possible cut in fuel tax, could also reduce future rate hikes.
“Markets were already over-reacting to global risk and to adjustment in liquidity that started last year and have priced in excessive rate hikes. Since consumer demand continues to be soft and inflation is likely to reduce it further, such excessive rate hikes may not be necessary to impose the quantum of output sacrifice required to moderate inflation. A surprise in timing with an unannounced meeting at the start of the rate hike cycle may be better to mitigate further over-reaction," Goyal said.
MPC member and RBI deputy governor Michael Patra suggested a calibrated approach to hikes once RBI reaches pre-covid “neutral accommodation". Governor Shaktikanta Das said MPC would have been forced to do a much stronger rate action in June had it not acted in May, assuring it remains committed to bringing down inflation within the threshold level.
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