Wednesday, February 8, 2023
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Minutes of RBI policy meeting indicate an interest rate increase, not a cut

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Despite lowering inflation projections just two weeks ago, the tone of the minutes show the debate was veering toward a possible interest rate increase and the next meeting could see the split deepening. 

The most hawkish member of India’s monetary policy panel is likely to get support from an influential colleague, signaling an interest rate increase is more probable than a cut.

At the April 4-5 policy meeting, Deputy Governor Viral Acharya said there was a revival in investment activity and an improvement in capacity utilization, which boded well for the economy. As a result, he was switching from a neutral stance to shift “decisively to vote for a beginning of ‘withdrawal of accommodation’ in the next monetary policy meeting in June.”

Minutes of the policy meeting this month showed most members of India’s monetary policy committee are optimistic that Asia’s third-largest economy will rebound this year with the output gap closing, a factor that is likely to boost inflation in coming months.

A majority of the six-member panel flagged upside risks to inflation earlier in April when the central bank retained the benchmark repurchase rate at 6 percent as expected. Five of the six members voted for the decision, while one, Michael Patra, who is an executive director heading the research department, sought an increase. The panel also kept its neutral policy stance.

Preparing for Hike

“He might be preparing markets for a rate hike in the coming months,” said Rohan Chinchwadkar, assistant professor of finance at the Indian Institute of Management at Tiruchirappalli in southern India, referring to the statement of Acharya, who is in charge of monetary policy. “But it still seems unlikely to happen in June.”

Governor Urjit Patel said there are clear signs of revival with the manufacturing sector strengthening, adding that input cost pressures were rising and companies were gradually regaining some pricing power.

All of which indicate that the current easing in inflation is likely to prove temporary, with firm fuel prices, an expansionary budget, higher food procurement prices for farmers and a recovery in vegetable prices in coming months set to fuel price pressures.

Just two weeks ago, Patel and his monetary policy committee lowered inflation projections, raising expectations that interest rates will be on hold for sometime to come.

But the tone of the minutes show the debate was veering toward a possible interest rate increase and the next meeting could see the split deepening.

More Hawkish

“The minutes look more hawkish than the policy statement,” said Indranil Pan, chief economist at IDFC Bank. “From here on, the probability of a rate hike has increased.”

The RBI is forecasting inflation for April to September at 4.7-5.1 percent, slower than 5.1-5.6 percent made just two months back. It expects the second half inflation to ease to 4.4 percent, having earlier estimated it at 4.5-4.6 percent. The bank’s goal is to keep headline inflation close to 4 percent over the medium term.

While incoming data and policy decisions related to factors such as minimum support price, excise on fuels and expenditure announcements remain critical, the minutes suggest a back-ended rate hike in 2018 remains a possibility, if headline inflation exceeds the trajectory set out by the MPC, said Aditi Nayar, principal economist at ICRA Ltd.

The central bank forecasts the economy will expand 7.4 percent in the financial year to March 2019, up from an estimated 6.6 percent in 2018. That’s faster than a 6.5 percent expansion projected for China in 2018 in a Bloomberg survey.

“RBI in all probability is on the cusp of raising rates,” said Teresa John, an economist at Nirmal Bang Equities Pvt Ltd. in Mumbai, adding that the expectation is for a 25 basis point increase in the second half of the calendar year of 2018 with inflation likely to average 5 percent in the financial year to March 31.




Patel (slight hawk) Credit off-take from the banking sector has continued to improve and it is becoming gradually more broad-based. Even as inflation has moderated in recent months, several upside risks to inflation persist. Hence, I would like to wait for more data and watch how various risks to inflation evolve, going forward. There are several upside risks to inflation, especially from the staggered impact of HRA increases by various state governments; policy for arriving at the minimum support prices for Kharif crops; and the fiscal slippage as indicated in the Union Budget, which also has attendant “crowding-out” implications with regard to the cost of private domestic credit. Acharya (hawk) I feel it is important to let some more hard data come in, specially on growth, and allow some more time to let the early skirmishes on the global trade front play out. I am, however, likely to shift decisively to vote for a beginning of “withdrawal of accommodation” in the next MPC meeting in June. The next few months of inflation and growth data will be key to determining the evolution of policy rates. If growth remains robust and inflation prints continue to project headline inflation a year ahead well above the target, then a change in stance from “neutral” to “withdrawal of accommodation” might have to be considered. Dua (middle) With upside risks to inflation and lacklustre growth prospects, a wait and watch strategy with respect to evolving risks, along with status quo in interest rates, is currently recommended. Fiscal deficit slippage and the slower than expected fiscal consolidation as well as the staggered impact of house rent allowance by state governments may also exert pressure on inflation. Dholakia (dove) There is a revival of economic growth but not to the level expected by RBI. Although the capacity utilization has improved to around 74 per cent, I feel, it is still far below the threshold required to induce substantial fresh investment. The fiscal space to accommodate future higher oil price shocks seems to be absent given the slippage in the Union budget for 2018-19. Impact of the increase in customs duty and MSP proposed in the budget on the headline inflation is again uncertain. Although there is substantial fiscal slippage by the Centre, the fiscal performance of major states needs to be watched. Ghate (middle) Overall, growth signals are strong. Most indicators of the output gap suggest that it is closing. While consumption continues to be robust, investment is accelerating. Food inflation continues to impart volatility to headline inflation and drive headline inflation momentum. While details on the exact procurement policy are awaited, the enactment of a more elaborate procurement policy in the 2018-2019 Union Budget will put stress on state finances as well. Fiscal slippages in India are inflationary!. Patra (uber hawk) The ebbing of inflation in January and February will likely extend into the reading for March, given the continuing decline in prices of vegetables. Does it present a persuasive case for an easier/neutral monetary policy stance? In my view, that will be time-inconsistent and will push the achievement of the inflation target farther out in time, given the current assessment that the target is not likely to be achieved during the full course of 2018-19, absent policy action. The target is in danger of getting out of reach and over the next few months, the upper tolerance band is under threat. This could seriously dent the credibility of the Committee’s commitment to the target.— Bloomberg.

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