Whether MPC will be unanimous this time?

 Will MPC return to unanimous decision this time?

The Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) is meeting in Mumbai today to review the policy (repo) rate and the monetary policy stance for the next two months. 

My views are:

Policy Rate: RBI is likely to maintain the pause in the policy rate as 

(i) Retail inflation, which was keeping around  4.80% since March 24, shot upto 5.08% in June 2024, more or less representing the levels that were prevalent in January and February 2024. More pertinent was the inflation of 5.66% in rural areas, where the consumption demand has surged in the last few months.

(ii) Any reduction in repo rate will have an immediate impact on the lending rates to retail and MSME segments, which are now mandatorily linked to external bench mark rates (majority of banks linked their loan rates to repo rate). When inflation is nowhere near the target rate of 4%, reduction in unsecured retail credit lending rate might stoke up inflation as most of the loans are for consumption only.

(iii)The import duty on gold, which roughly accounts for 7% of total imports, has been reduced from 15% to 6%. The impact of the reduction in the duty on added domestic demand for gold is yet to be ascertained, though events in the past indicate that the demand for gold consumption is likely to go up in the short term.

(iv) Indian Rupee is now hovering around Rs.84 level per USD as against the range of Rs.82-Rs.83.50 witnessed in the last one year.

(v) Though RBI Governor repeatedly asserted that only domestic factors influence policy rate, the decision of FED, to keep its rate unchanged, is bound to have a bearing as cash flows through foreign investments does have a bearing on the economy, forex reserves and the value of Indian rupee vs. USD.

Monetary Policy Stance: In the last few reviews, MPC, by majority, kept the monetary policy stance as "Remaining focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth". In the last review, two members of the MPC suggested for a change in the stance to ‘neutral’ as liquidity constraints were witnessed. But things appear to have changed, if one goes through the weekly statistical supplement and the daily ‘ money market operations’ statements from RBI, no variable rate repo (VRR) auctions were conducted in the last two weeks. On the contrary, variable reverse repo rate (VRRR) auctions of different maturities were conducted. Monies kept by the banks in the SDF with RBI is also on the surge. In these circumstances, the MPC may well continue to maintain the same stance that is followed in the last few reviews.

While pause in repo rate and no change in stance might be the decisions of MPC after its present review meeting, the only point of interest to me is whether those decisions will be that of the majority supporting such decisions or will they be arrived at unanimously.

Regards

V. Viswanathan

6th August 2024

Comments

  1. AnonymousAugust 6, 2024 at 8:19 PM

    The problem for all indian bloggers is that most of our figures are tampered with

    ReplyDelete
    Replies
    1. V. ViswanathanAugust 7, 2024 at 2:24 AM

      The inflation figures, import duty reduction on gold, average indian rupee vs USD are available in public domain. What other figure is tampered with?

      Delete

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