MPC minutes reveal dilemma, CPI data discrepancy, says SBI Research
3 min read 23 Feb 2023, 02:35 PM ISTOne of the MCPC member said that India does not have to follow the US Fed as large excess demand, tight labour markets and an unprecedented deviation from the inflation target are absent in India, highlighted the SBI report.
PremiumThe Reserve Bank of India monetary policy committee (MPC) met during February 6-8, 2023 in which it increased the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.50%.
The MPC members voted on the resolution to increase the policy repo rate to 6.50% in a ratio of 4:2. “Dr. Shashanka Bhide, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted to increase the policy repo rate by 25 basis points. Dr. Ashima Goyal and Prof. Jayanth R. Varma voted against the repo rate hike," said the RBI statement.
SBI Research said that minutes of the MPC show the two external members expressing ‘dissent’, as they feel the excessive interest rate hike has implications for economic growth.
“RBI has released the minutes of the MPC which shows the two external members expressing dissent. These members clearly expressed that excessive interest rate hike has implications for economic growth as raising real policy rates could reduce demand and have a stronger effect on growth than it does on inflation and one should take into account the lags in policy transmission," said the report.
The report also pointed out that one of the member said that India does not have to follow the US Fed as large excess demand, tight labour markets and an unprecedented deviation from the inflation target which are prompting the Fed to continue hiking rates are absent in India.
“The MPC decision reflects a heterogenous conglomerate," said the report.
SBI Research in its report said that it has that developed a interest rate skewness index to measure to reflect into the minority viewpoint on policy rate action.
“A positive skewness (Skewness index> Voting decision) reflects possible tightening in future. A negative skewness (Skewness index< Voting Decision) reflects possible easing in future. Our current Skewness Index is indicating that going forward, rate hikes will either pause or be of lower magnitude (15 bps). Thus, space for further rate hikes looks low at the margin," the report said.
Price pressures in India remain high and it would be premature to lower the guard on inflation, majority of the members of RBI monetary policy committee (MPC) said.
"It will be premature to pause when there are no definitive signs of slowdown in inflation, particularly core inflation," wrote RBI executive director and MPC member Rajiv Ranjan.
The MPC is mandated to bring retail inflation down to 4% over the medium term, while keeping it within the target band of 2%-6%.
The SBI Research report stated it was ‘increasingly worried about how the CPI is measured by CSO,’ as CPI is based on Consumer Expenditure Survey (CES) of 2011-12.
“Notwithstanding this increase in CPI inflation, we are now increasingly worried about how the CPI is measured by CSO. Currently, CSO measures CPI based on the Consumer Expenditure Survey (CES) of 2011-12. The CES survey shows a clear downward trend in expenditure on food but data is not available beyond FY12 and thus latest CPI data based on such CES survey may be misleading and overstated," SBI Research report said.
“Thus, January CPI inflation actually declines to 5.69% against 6.52%, applying the NAS food weights at 32.5% instead of 46% as is given in CPI," it added.
The report states that with the rise of 250 bps in repo rate from May 2022, banks have transmitted it to both deposit and credit rates. It said that around 170 bps has been transmitted to deposit rates and 125 bps to fresh loans.
However, the retail loans rate has increased by 250 bps as benchmarked to RBI’s repo rate.
“With the rise in deposits rate, ASCB’s deposits continue to rise and is now outpacing credit growth since Q2FY23," the report stated.
