MPC Members Have Reasons To Keep Repo Rate Unchanged

MPC members, who decided to keep repo rate unchanged at 6.5 per cent for the 10th time consecutive time during their 7-9 October meeting, have approached voting from different vantage points. Dr. Nagesh Kumar’s proposal to cut rate effectively put the stance in accommodation, is based on achieving the objective and his assessment suggests that sacrifice ratio is beyond threshold. Saugata Bhattacharya’s position was influenced by ambiguity in signal-to-noise ratio of the incoming data, which could lead to policy error and therefore needs conservatism.

However, vote for neutral stance appears to be more decided by the views on growth rather than inflation. Prof. Ram Singh’s views flow directly from the core objective and the concern that high food inflation may spill over to non-core portion of the inflation. That lagged effect of the policy has achieved objective and revision in stance is needed to keep the costs of achieving the objective in check. Dr. Rajiv Ranjan, the only member to have continuity from August meeting, reiterated his position that policy action is on course to achieve the objective and the window of opportunity to revise the stance will be open in October. The two members from the Reserve Bank of India (RBI) have clearly focused on inflation.

Its Deputy Governor has emphasised tapering of factors in the coming months that imparted persistence to domestic inflation, which supports revision instance. The Governor’s statement calls for operational flexibility to evolving situation. The meeting’s minutes showed a clear demarcation in the views of the three new external members, even as views of the internal members were relatively more dovish. Dr. Kumar focused more on medium-term challenges to the country’s industrial growth due to the unfriendly global environment, while Saugata Bhattacharya emphasized more on near-term indicators and financial conditions. There was a broader consensus in the MPC regarding anchored inflation expectations and the downward trajectory for headline inflation, with the balanced growth-inflation picture cited as the main reason for the stance change. Emkay maintains that a December cut is a low probability, with various domestic and global push and pull factors weighing on policy considerations ahead. The Committee members see the overall decline in inflation expectations since 2022 as well as the more recent softening as evidence that sticking to a tighter monetary policy has helped anchor them.

Further, there was an unanimous agreement on upside risks from food inflation being transitory, with healthy rainfall and sowing activity expected to bring down food prices from December onwards.The minutes’ echo analysts’ view that various push and pull factors will weigh on policy considerations ahead, and that rate cuts commencing from December are not given, as of now. Weaker activity data and existing slack will continue to exert disinflationary pressure on core prices, even as food inflation stays somewhat untamed. Meanwhile, despite the commencement of Fed’s cut cycle with a bumper 50-bps cut, the recent upside surprises on US growth, labour market and inflation have reignited underappreciated risk of a ‘higher for longer’ scenario.