Do members in the MPC Meeting discuss thus?

 'Dream' MPC Meeting - 
Repo raised by 15 bps!

(Below created characters and conversations are purely imaginary; might or might not reflect reality; Intention is not to hurt anyone; if it hurts anyone, my sincere apologies to them)

It was a long day. I went to sleep around 11.30 P.M., setting the alarm at 4.30 A.M., the next day. Believe it or not, I could visualize and hear the deliberations of the Monetary Policy Committee (MPC) of Reserve Bank of India, slated from 6th Feb to 8th Feb 2023. 

"Chairman: Good morning ladies and gentlemen. Hearty welcome to the first meeting of the MPC for the year 2023. Can some honorary members entail the major concerns, that led to decision to increase the repo rate for the fourth time in a row in the last meeting.

MPC Member 1.

• CPI inflation, at 6.88% for October 2022, was higher than the upper band of the target rate for the tenth month in a row. 
• While headline inflation may ease in Q4 FY 23 and Q1 FY 24, core inflation still exhibits stickiness.
• Since resurge in domestic service sector could lead to price increase (as firms pass on input costs), the medium term inflation outlook remains uncertain.
• Average Crude Oil is still estimated to be around USD 100 per barrel.
• Sir, this, of course, was not recorded in the minutes, the decision of Federal Reserve to increase its fund rates by 50 bps also had an impact in our decision.

MPC member 2:

Things have eased since then. 

• Retail inflation came below the upper band of the target rate, both in November (5.88%) and December (5.72%). Food prices, comprising 40% of the basket, eased to 4.19% in Dec. 22
• Average Crude Oil Prices rule at 15-20% less than USD 100 per barrel, assumed in our inflation projections.
• Rabi Sowing was good, considerable pick up in manufacturing activity and continued robust bank credit growth - all together pointing to further ease of prices and inflation in the coming months

MPC member 3: (objecting) While narrating the positives, I think the sticky core inflation, still remaining a concern, is missed out. Indian rupee to dollar even now rules above the Rs.81 levels and the danger of imported inflation is a reality. Current account deficit (CAD) at USD 36 billion in Q2 FY23, more than double as compared to the previous quarter, is another cause of concern

MPC member 2: (nods in disagreement) Indian Rupee versus USD is at the same level for the so many months now and is already factored in our earlier rate increases. Transmission of repo/lending rate is still incomplete and may get reflected only after a lag. Forex Reserves, which started climbing up since out last meet, is at USD576 billion and accounts for app. ten months of imports.

MPC member 4: (in a lower voice) If we see the positive factors only, let us also remember that we  had to write to the government, explaining the reasons for RBI, in not being able to control the inflation within the target of 4% plus or minus 2%. In the last 12 months, the inflation was within the upper end of target rate only for two months. Please also remember that FED has increased the fund rates yet again, though at a low level of 25 bps this time ( as compared to 75 and 50 bps on earlier occasions).

MPC member 2 Can someone highlight what the "experts" expectations are in the matter?

MPC member 1: They predict a 25 bps increase. All of them appear to be unanimous in their view that the tightening of policy rate, softened during COVID period, should not only stop at pre-COVID levels but should reflect the rate prevailing prior to the present Governor regime started 

Chairman: (surprised) What do you mean?

MPC member 1: Repo rate was at 6.5% in 2018, prior to your taking charge in Dec 2018.

Chairman: So, what is the consensus?

MPC member 3: (in a measured tone) Calibrated Monetary Policy action is still warranted to break core inflation persistence and contain second round effects. But if we increase the rate by 25 bps, there might be criticism that we sound more conservative than FOMC, who reduced their increase in fund rates from a peak of 75 bps to 25 bps now. 

MPC member 4: Then we will keep the increase at 15 bps. That will also keep the market and experts to speculate that the 'terminal interest rate', before which a 'pause' button can be pressed, is not yet reached.

Chairman: O.K. What will be the monetary policy stance.

MPC member 2: The wordings "Remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth" can be repeated. It conveys and do not convey also.

MPC member 3: Chairman Sir, please remember to sum up, as usual, with an appropriate quote from the father of the nation so as to keep the nation optimistic and positive.

Chairman: Thank you all. The deliberations were healthy and warm. "

At this moment, before I could have a tea with them, I woke up suddenly, as the alarm in my mobile went online. I looked at the calendar. It is 6th Feb 2023. And the MPC meeting will start today only.  It was a dream to remember. Like all of you, I will also wait for 8th February 2023 to hear from the Governor of RBI about what transpired in the MPC and where the Repo Rate heads to.

Regards

V.Viswanathan

6th February 2023 5.00 A.M.