Home / Opinion / Views /  The monetary policy committee vote was closer for good reason

A week to the day, Finance Minister Nirmala Sitharaman unveiled a responsible if somewhat elitist Union budget, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) announced its own monetary policy decision—a hike in the repo rate (at which RBI infuses liquidity) by 25 basis points and an unchanged stance, “focused on withdrawal of liquidity".

Unlike in the past, when inflation was on an upward trajectory, we now have data showing two consecutive months of slowing but still high inflation. In the circumstances, one could argue, as many economists, including MPC member Jayanth Varma, have done, that there is a case to pause rate hikes; see how past hikes have played out, both on growth and inflation, and then act.

Economists, however, are seldom known to agree. “If all the economists were laid end to end, they’d never reach a conclusion," quipped English playwright George Bernard Shaw.

Understandably, therefore, there were many who argued for a rate hike, but at a slower pace than before. Hence, the case for a 25 basis points hike, down from 35 basis points in the December 2022 policy announcement. And this is what the MPC has gone with, albeit by a smaller majority than earlier.

Unlike in December, when the MPC voted by a 5:1 majority to hike rates 35 basis points, this time round, the vote was closer, at 4:2. Remember, MPCs in India have always set great store by unanimity, so the split-vote warrants close examination. It suggests a third of the MPC members, more particularly two-thirds of its external members (who are more likely to take an independent view), did not quite agree with the majority decision.

On the growth front, we see the same difference in opinion, with two MPC members—the same two who struck a different note on the rate hike—voting against continuance of the ‘focused-on-withdrawal-of-liquidity’ stance in a scenario where the growth-inflation trade-off has subtly, but clearly, changed.

But central banking, we all know, is more an art than a science. Especially when the data is so ambiguous. With that caveat, my quarrel with RBI’s latest monetary policy announcement is on three counts: stance, current account deficit (CAD) and risks to growth. Take these one by one.

On stance: Excess liquidity has, doubtless, come down from over 8 trillion about a year ago to a little over 1 trillion today. But monetary policy is not about today; it is about tomorrow.

Over the coming months, liquidity will be impacted by the redemption of LTRO (long-term repo operations) and TLTRO (targeted long-term repo operations) funds. At the same time, substantially higher credit vis-a-vis deposit growth and the government’s larger borrowing programme—of 15.4 trillion as against 14.2 trillion in fiscal 2022-23—is bound to put pressure on liquidity. Rising US interest rates and growing prospects of a soft-landing are also likely to see a reversal of funds coming to India in search of yields.

Remember, RBI is the Indian government’s debt manager, charged with ensuring that government borrowing goes through smoothly and at the best (read, lowest) possible rate of interest. That cannot happen if liquidity is tight. After all, it is not so long ago that the governor termed low interest rates a “public good" and RBI frowned at yields in excess of 6% on 10-year government securities. Today, yields are well over 7% and likely to move higher.

On stance, therefore, there was a strong case to move to “neutral". That would have given the MPC the freedom to either tighten or ease liquidity, depending on the “evolving situation". And a chance for RBI to prove its agility.

On the CAD: With the current account deficit touching 4.4% of gross domestic product (GDP) in the second quarter, RBI’s view that the CAD is expected to “remain eminently manageable and within the parameters of viability" seems excessively optimistic. Today, the net balance under services and remittances is in large surplus and partly offsets the trade deficit. But the slowdown in global software and IT spends is bound to impact services exports adversely.

With China opening up, there is no certainty the present moderation in commodity prices will endure. And while lower import costs could help lower India’s trade deficit, where lower import costs are because of lower import volumes, driven in turn by lower growth, the outcome may not be unambiguously good. Especially when merchandise exports are also expected to slow.

On growth: Prima facie, downside risks to economic growth are much higher than the statement cares to admit. One, because exports are unlikely to be an engine of growth and private investment is still fighting shy. In all probability, the growth estimate of 6.4% will have to be toned down, necessitating the case for a relook at the present restrictive stance.

So, where do I agree with the MPC, or rather, its majority decision? On balance, on the repo rate hike. Given the stickiness we have seen on core inflation—over 6% for more than a year now—a 25 basis points hike may not do much good given that a cumulative hike of 250 basis points in less than a year is yet to deliver on the price front and is yet to play out fully as well. But then, it is unlikely to do much harm either!

On a lighter note, for the first time, Governor Shaktikanta Das ended his statement with a quote from Netaji Subhas Chandra Bose, rather than Mahatma Gandhi (though the latter came in for a mention earlier). I leave it to the reader to form her own take (stance?) on that!

Mythili Bhusnurmath is a senior journalist and former central banker

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