If I were inducted as a member in MPC

 If I were a new MPC member, I will vote for status quo

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. Since the last review of MPC on 8th August 2024, the following developments  are noteworthy. 

Domestic: 

(i) The Central Government has appointed  Dr. Ram Singh, Shri Saugata Bhattacharya and Dr. Nagesh Kumar as the new members to the MPC in place of the three members, who completed their terms recently*. It will be the first interaction for the above members with the other three members of the MPC and it will be of interest, how they vote in the decision of the committee on repo rate and monetary stance.

(ii) CPI inflation rate at 3.6% in July 24  and 3.7% in August 24 were below the target repo rate of 4%. 

(iii) GDP growth was at 6.7% in the April-June quarter, due to decline in the government expenditure on account of general elections.

External:

(i) FED Reserve rate was reduced by 50 bps as against the much expected rate cut of 25 bps. It was also indicated that the reserve rate may be cut by another 50 bps before end of December this year.

(ii) China announced a major financial stimulus to induce the stagnant growth in their economy. The major ones are the 50 bps reduction in the reserve ratio to be maintained by the banks, which is expected to pump in more liquidity in the banking system for onward aggressive lending and the decline in mortgage loan rates that is expected to benefit 15 cr. borrowers.

(iii) The surge in the crude oil prices since last week and the expectations are that it is likely to breach USD 80 levels (per barrel) very shortly.

My views are:

Repo Rate:

1. The retail inflation is below the target repo rate in July and Aug 24. However, it will be prudent to watch the sustainability at the above level in the coming months (at least up to Dec 24), especially due to erratic inflation levels reported under food and core sectors. The monsoon was also erratic with excess rainfall in some months and deficiency in months in between.

2. Though RBI Governor repeatedly stress that domestic factors only influence the repo rate, the three developments under external have to be factored in. Most important will be the impact of increase in crude oil prices, which account for nearly 80% of the import bill, and any substantial increase is always passed on to the consumers, fueling the prices upwards and thereby the inflation.

3. Any reduction in repo rate at this juncture will compel the banks to reduce their lending rates to the existing loans in the retail sector, as the lending rates are linked to repo rate. However, they may not reduce their loan rates on the new loans immediately, since they may find it difficult to reduce the deposit rates. If the deposit rates are reduced, the customers may shift their funds with the banks along with the new additions to alternate funds for getting better returns.

Considering the above, I still maintain that the repo rate, unchanged since Feb 23, be allowed to continue at 6.5%

Monetary Policy Stance: Since the last review, nothing has changed much to advocate for a review in the the monetary policy stance, at present, reading as under: "Remaining focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth". Continued comfortable liquidity in the banking system, the call rates remaining in the middle of the repo rate of 6.5% and the bank rate of 6.75% do not give enough handle to RBI MPC to shift the stance to 'neutral' 

Regards

V. Viswanathan

7th October 2024

*As per the provisions of the RBI Act, the Monetary Policy Committee (MPC) consists of six members — three members from RBI and three were appointed by the central government. The three members of RBI are Governor, Deputy Governor and one officer of RBI nominated by the RBI Central Board.