MPC Minutes: JR Varma's Dissent, Mridul Saggar's Hint At Normalisation
A security guard stands by a Reserve Bank of India logo in the RBI building in Mumbai. (Photographer: Karen Dias/Bloomberg)

MPC Minutes: JR Varma's Dissent, Mridul Saggar's Hint At Normalisation

India's six-member Monetary Policy Committee saw its first signs of dissent at its August meeting, since the Covid-19 pandemic led the central bank into crisis-time policies.

That dissent came from JR Varma, who argued that it is time for the central bank to start lifting the floor on policy rates by raising the reverse repo rate and change the accommodative stance, even as the level of policy rates remains appropriate.

Mridul Saggar, Reserve Bank of India executive director, while voting along with the rest of the committee, said "gradual disruptions that are non-disruptive" are possible within the accommodative stance as well. A repo rate change at this stage would not be effective, Saggar argued.

Committee members remained watchful on inflation but most said extended support to the economic recovery is warranted.

The need of the hour, according to RBI Governor Shaktikanta Das, is to continue monetary policy support to economy and remain watchful of durable inflation pressures.

Managing the economy and the financial markets since the beginning of the pandemic has thrown up several challenges with crosscurrents and conflicting objectives. Under such circumstances, macroeconomic policies have to be carefully nuanced by making judicious policy choices. Continued policy support with a focus on revival and sustenance of growth is indeed the most desirable and judicious policy option at this moment.
Shaktikanta Das, RBI Governor

JR Varma Dissents On Reverse Repo Rate, Accommodative Stance

India's MPC is mandated with keeping inflation in a band of 4 (+/-2)% using a single policy tool of the repo rate. The reverse repo rate, which effectively becomes the operative policy rate in times of excess liquidity, is under the purview of the RBI.

At present, the market sees the reverse repo rate as the benchmark.

Varma argued that this rate, currently at 3.5%, is too low. He prefaced his remarks by saying that while the reverse repo rate does not fall within the MPC's purview, it is referenced in the committee's statement. "Hence, I have no choice but to express my disagreement with the level of the reverse repo rate."

"In my view, a phased normalisation of the corridor would increase the ability of the MPC to keep the repo rate at 4% for a longer period, and this should in my view be a greater priority for the MPC than maintaining an ultralow reverse repo rate for some more time.

Varma said the prevailing negative real rate of 1-1.5%, based on the repo rate of 4% and forward inflation projections, is appropriate for the economy at this stage, given that growth was weakening even before pandemic hit.

The MPC, however, cannot take its eyes off inflation.

Varma stressed that the MPC's inflation is 4% and not 5% or 6%. "By creating the erroneous perception that the MPC is no longer concerned about inflation and is focused exclusively on growth, the MPC may be inadvertently aggravating the risk that inflationary expectations will be disanchored."

This, according to him, would cause long-term rates to rise. "On the other hand, by demonstrating its commitment to the inflation target with tangible action, the MPC will be able to anchor expectations, reduce risk premia, and sustain lower long term interest rates for longer thereby aiding the economic recovery."

For these reasons, I am not in favour of the decision to keep the reverse repo rate at 3.35%, and vote against the accommodative stance, Varma wrote.

Mridul Saggar's Hint At Normalisation

Saggar, while voting for a status quo on the repo rate and maintaining the accommodative stance, signaled that normalisation may continue despite that.

With surplus liquidity at close to Rs 11.5 lakh crore, Saggar suggested that any change in the policy rate would not be apt in term of sequencing the withdrawal from crisis time policies.

"Changing repo rate at this stage will not be effective and apt from sequencing viewpoint," he wrote.

According to Saggar, the policy focus to revive growth on a durable basis needs to continue and "should entail consideration to avoid inflation risks that may emanate when credit demand improves, likely ahead of output gap closing."

"This arduous task needs to be carried without endangering sustainable recovery in growth," he said, adding that gradual adjustments in policy are possible even within the accommodative stance.

Narrative economics plays an important role in difficult times as even animal spirits are characterised by fat tails and can produce endogenous business cycle movements. However, averting markets becoming opiated to slush liquidity designed as temporary crisis measure is critical to facilitate unwinding when the time comes. Gradual adjustments that are non-disruptive are possible within the accommodative stance.

Alongside the August MPC review, the RBI increased the size of its variable rate reverse repo operations.

Saggar, who in the minutes of the June MPC meet, had expressed concern about the elevated inflation, said interpreting inflation trends have turned difficult with these mixed trends and some fuzziness in data.

Even though the nature of inflation is cost-push, persistence of inflation is worrisome, especially as inflation expectations are getting impacted, Saggar said.

Majority View Remains Dovish

RBI Governor Das, Deputy Governor Michael Patra and members Ashima Goyal and Shashanka Bhide remained focused on growth in their commentary.

"The economy is struggling to regain the momentum that had gathered in the second half of 2020-21. As mentioned earlier, a solidly entrenched increase in aggregate demand is yet to take shape," said Patra, while adding that inflation may persist at elevated levels.

The highest priority now is to revive growth along a sustainable trajectory that becomes compatible with the inflation target as the pandemic recedes, said Patra.

The price that has to be paid for this policy choice is inflation in the upper reaches of, but within, the tolerance band in this exceptional, pandemic ravaged year of 2021-22, as against the overshoot above the upper tolerance band in 2020-21. So far, inflation outcomes are tracking this projected path.
Michael Patra, ED, RBI

The flexible inflation targeting framework allows adequate flexibility to the MPC to deal with unanticipated shocks to the economy in the conduct of its monetary policy, wrote Governor Das.

"The Reserve Bank’s whatever-it-takes approach, bolstered by careful guidance on all aspects in the conduct of monetary policy, has been an important facilitator for the cusp of recovery that we are witnessing at the present juncture," he said.

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