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Hawks Vs Doves: MPC Members Differ On Growth Risks To Indian Economy

India’s six-member Monetary Policy Committee differed on the downside risks to the country’s growth prospects, leading to a split vote for a second consecutive rate cut at its April meeting.

Four committee members, including Reserve Bank of India Governor Shaktikanta Das, felt that there are increasing signs of weakness in growth and investment, prompting a vote in favor of a rate cut. The remaining two members, including RBI Deputy Governor Viral Acharya, felt that interest rates were at an appropriate level given the growth-inflation dynamics, and didn’t require further tinkering.

The MPC voted 4-2 to cut repo rate by 25 basis points to 6 percent at its meet in April. It voted 5-1 to keep its stance unchanged at ‘Neutral’.

Shaktikanta Das, Governor, RBI

Das, who chaired his second MPC meet in April, voted in favour of another rate cut of 25 basis points to 6 percent. He had supported a rate cut at the February meet as well.

Since the February meet, there has been “further weakening of domestic growth impulses” and slowing global growth poses major headwinds to exports, said Das in his statement in the minutes. Das cited several high frequency indicators such as passenger vehicle sales and output to support his view on the increasing risks to growth, while adding that the inflation outlook remains benign.

Investment demand is losing traction and a deceleration in exports may further impact investment activity. With the inflation outlook looking benign and headline inflation expected to remain below target in the current year, it becomes necessary to address the challenges to sustained growth of the Indian economy. 
Shaktikanta Das, Governor, RBI

While Das called for “vigil” on the government’s finances, he did not see that as enough cause to keep rates unchanged.

In his statement, Das also called for a rethink on the quantum of rate moves. As detailed by him at the IMF-World Bank meetings earlier this month, Das said varying the quantum of rate moves can be an effective way to communicate the MPC’s stance.

Also read: Is Shaktikanta Das Signalling A Shift From The ‘25 Basis Point’ Rate Moves?

Viral Acharya, Deputy Governor, RBI

In contrast, Acharya, deputy governor in-charge of monetary policy, wrote that the level of interest rates is “just right” for achieving the 4 percent inflation target over the medium term.

Acharya said he would have supported a cut in rates at the April meet had the MPC not voted for a rate cut in February. “However, given that the MPC had already cut the policy rate to 6.25 percent at its February meeting, the relevant decision now for me was whether to reduce the policy rate further from 6.25 percent,” Acharya wrote.

Acharya noted a few upside risks to inflation, including oil prices, which have risen 10 percent between the February and April meetings. He also cited the risk of a fiscal response to the agrarian crisis, which could pose an upside risk to inflation.

On growth, Acharya said that indicators remain mixed. He cited the “finance-neutral output gap” to suggest that room for rate cuts remains limited.

Aggregate flow of financial resources to the commercial sector remains robust with banks substituting for the weak credit growth of non-banks; bank credit growth continues to be above nominal GDP growth; equity markets have been buoyant; foreign portfolio flows have reversed into India following the dovish stance of advanced country central banks; together, these imply that the finance-neutral output gap, my preferred measure of output gap which accounts for financial cycles, continues to remain closed.
Viral Acharya, Deputy Governor, RBI

Michael Patra, Executive Director, RBI

Patra, the quintessential hawk who turned dovish in February, said that real GDP growth is expected to be below 7 percent in the first two quarters of 2019-20.

Patra sees growth risks emerging from a slowdown in personal consumption, the possibility of weaker government spending due to fiscal pressures and a drop in export buoyancy. He expects headline inflation to remain in check over the 12-month horizon and cited easing inflation expectations of businesses and households as one reason to believe that the target of 4 percent may not be at risk.

Signals extracted from all this information would argue that if the primary target for monetary policy is likely to be achieved on a durable basis, some space opens up for policy attention to the objective of growth as enjoined by the RBI Act  
Michael Patra, Executive Director, RBI

Ravindra Dholakia, Member, MPC

Dholakia continued to be the strongest advocate of lower rates in the committee and voted for a rate cut along with a change in stance to ‘Accommodative’.

Dholakia wrote that he sees space for another 40-50 basis points in rate cuts. He, like governor Das, seemed to veer away from the tradition of adjusting rates in doses of 25 basis points each saying that he would have preferred a 35-40 basis point cut at the April meet.

Dholakia continues to believe that inflation is “well under control” and that real rates in the economy are too high. He also drew a link between the output gap and the employment gap and noted that the two factors together call for a policy response.

The downward revision of real growth from 7.4 to 7.2 percent for the coming year 2019-20 by the RBI, therefore, opens up the output gap reflecting the unemployment gap substantially and needs a policy response.
Ravindra Dholakia, Member, MPC

Chetan Ghate, Member, MPC

Ghate, the only member other than Acharya who voted for a status quo, also suggested that risks to growth were being overstated. He sees the sub-7 percent growth of the third and fourth quarters of FY19 to be “kitchen sinking” quarters for the Indian economy.

On inflation, Ghate, like Acharya, cited possible fiscal risks emerging from attempts to ease agrarian distress. “I continue to view the elevated levels of the combined fiscal deficit and the ongoing thrust towards competitive populism as jeopardising the durability of inflation in the medium term. This should be carefully watched.”

Ghate said frequent changes in rates may introduce unnecessary uncertainty and volatility to the MPC’s actions.

Maintaining status quo on rates at the current juncture would be consistent with sustainable growth in the economy and achieving the inflation target over the medium term. Contrary to some of my colleagues in the MPC, I feel that frequent changes in policy rates and stance runs the risk of introducing uncertainty and volatility because of our own actions.
Chetan Ghate, Member, MPC

Pami Dua, Member, MPC

Dua called for a rate cut in light of the global growth slowdown and benign global and domestic inflation outlook.

Dua cited a narrowing gap between current inflation perceptions and inflation expectations, which indicate anchoring of inflation expectations at a lower level. “The Economic Cycle Research Institute’s Indian Future Inflation Gauge, a harbinger of inflation, remains in a cyclical downswing, indicating that underlying inflation pressures are still subdued,” Dua said.

On growth, Dua wrote that the ECRI’s Indian Leading Index has pointed to improved growth outlook but the export growth index continues to languish.

In view of the global growth slowdown and a benign global and domestic inflation outlook, I vote for decreasing the policy repo rate by 25 basis points and maintaining the neutral stance.
Pami Dua, Member, MPC