ED says RBI Delayed Tightening, So Can Delay Loosening

The Reserve Bank of India released the minutes of the April Monetary Policy Committee meeting last week, and while much of the statement was along the expected lines and in keeping with the drift of the MPC resolution and past statements, the notes of RBI Executive Director Rajiv Ranjan are worth a closer look.

But before that, the lowdown of the MPC's April minutes was that India's GDP growth was on a strong footing, which should help the committee to focus on the last mile of the disinflation process to peg the inflation rate to the 4⁒ target and ensure that inflationary expectations remain anchored.

To recapitulate, the April MPC had left the repo rate unchanged (since February 2023) at 6.50⁒ and retained the hawkish-sounding "withdrawal of accommodation" stance.

External MPC member Jayant Verma dissented again, voting for a 25-basis-point rate cut and shifting to a neutral stance. He contended that the real interest rate of 2⁒ is too high and would extract a growth sacrifice.

While external member Shashanka Bhide aligned with the RBI members, who usually draft the resolution, in recognising the room given by growth to focus on inflation, another external member, Ashima Goel, did not specify why she voted in favour of the resolution.

Her notes were mostly on core inflation and neutral interest rates, and she had no direct comment on why she voted in favour of the status quo on the stance and the rate.

She perhaps went along with the majority view, although she might have preferred a different outcome at the MPC meeting, given the high real interest rates.

Once bitten, twice shy

Rajiv Ranjan, the RBI Executive Director responsible for monetary policy, had detailed explanations for his vote favouring the status quo.

He wanted the MPC to avoid risks at the last mile of disinflation, when inflation (at 4.85⁒ for March 2024), is so close to the 4⁒ target.

"Our history, including that of many other emerging market economies, shows that taking any risk on the inflation front leads to a huge price in terms of unhinging of inflation expectations that elongates the inflation episodes and makes the price stability task more daunting," Ranjan noted.

According to Ranjan, the MPC should prefer to be cautious so early in the new financial year.

"The financial year 2022-23 is not far behind when all our assumptions and projections got altered within a month's time because of unforeseen events," he wrote in the minutes.

The current financial year has just begun, and it will take some more time before there is more clarity on monsoon, its spatial distribution, the impact of hot weather, rabi production and procurement, and kharif sowing, he noted.

"Return of inflation to the 4⁒ target is our objective, and having come this far, it is not far from sight. We need to utilize the space provided by stronger growth to focus on inflation."

According to Ranjan, while the global markets and the central banks in advanced economies were at odds regarding the prospects for interest rates, the Indian markets were more aligned with the RBI.

"This is a win-win situation for India's last mile of disinflation process," he said.

Even if food prices spike or overall inflation spikes due to geopolitical tensions in West Asia, inflation expectations won't get unhinged as anchored expectations may lower the passthrough of such shocks.

The Three C's

According to Ranjan, the RBI has a Flexible Inflation Targeting mandate that allows a 2-6 band for inflation.

The RBI used the "flexibility" part of the inflation-targeting mandate well and, with time, has ensured that the growth-inflation trade-off has blurred.

"Inflation is on a declining path and growth on a firmer footing," he said.

He said Thee Cs – Caution, Consistency, and Credibility have been the hallmark of the RBI's approach so far.

He had a prescription for his fellow members of the committee on the future moves:

'Caution' calls for waiting for more data.

'Consistency' will deter back-peddling in policy decisions taken so far.

'Credibility' would anchor inflation expectations.

"This approach has stood us in good stead despite challenges and we need to persevere with this for its merits," he said.

Delay Loosening

Ranjan's notes imply that he wants the MPC to delay the loosening of the monetary policy.

Ranjan hinted that the RBI did not tighten the policy quickly enough two years ago as it wanted GDP growth to consolidate. He said the RBI endeavoured not to give up the accommodative policy setting until growth took root and became self-sustaining.

This has resulted in growth sustaining itself despite the monetary tightening since May 2022.

He is advocating the same approach to tackle inflation as well.

"Instead of haste for policy action, patience is the need of the hour," he said.

To that extent, he advocates the RBI delaying rate cuts to ensure inflation sustains around 4⁒.

The RBI has been consistently hawkish with its comments on policy interest rates, with Governor Shaktikanta Das repeatedly saying that it was not enough for him to inflation hitting the 4⁒ target.

He wants it to stay there durably.

Ranjan's notes imply that the trick that worked for growth with the RBI using the flexibility part of the inflation targeting regime—tolerating higher inflation for growth—is now being used to tackle inflation by delaying rate cuts to break the back of inflation.

The long notes of Rajan's in the MPC minutes do explain the strategy of the RBI brass on the committee.