India Economics:Minutes of the MPC –Wait &Watch Mode


Minutes of December MPC meeting released: The RBI released today (20Dec) the minutes of the MPC meeting held on December 5-6, 2017. Recall,the RBI had held key rates unchanged with a vote of 5-1, with MPC memberDr. Dholakia dissenting for a 25bp rate cut.

Minutes of Feb MPC meeting released: The RBI released today the minutesof the MPC meeting held on February 6-7, 2018. Recall, the RBI had held keyrates unchanged with a vote of 5-1, with MPC member Dr. Patra dissentingfor a 25bp rate hike. In our view, the MPC minutes came across as slightlymore hawkish (at the margin) compared to the overall tone of themonetary policy statement of 7th Feb.

Minutes of October MPC meeting released: The RBI on Wednesdayreleased the minutes of the MPC meeting held on October 3–4, 2017. Recall,the RBI had held key rates unchanged with a vote of 5–1, with MPC member,Dr. Dholakia, dissenting for a 25bp rate cut. While MPC member, Dr. Patra,voted for a pause, he reiterated again that the RBI may need to be preparedto hike rates based on inflation trajectory (Dr. Patra had indicated need for arate hike in April 2017 as well).

    The details of the MPC reveal that all members who voted for the statusquo remain concerned about:

    Upside risks to inflation remain a concern: The MPC minuteshighlighted that all members remain concerned regarding upside risks toinflation, especially as various measures of inflation seem to beconverging above the 5% mark. The risks to inflation as per the MPCmembers stem from (1) fiscal slippage in the current year and the delayin achieving the fiscal consolidation roadmap, (2) inflationary impactfrom government’s policy to fix minimum support prices at 1.5x cost, (3)custom duty hikes announced in the budget, (4) turn in globalcommodity prices (though members also highlighted the possibility of oilprices to correct as supply-side response evolves) and (5) uncertaintyfrom monetary policy normalization in developed economies. On thedownside, the likely supply-side response and impact on oil prices,overcapacity in the system and government’s food management policywere alluded to.

    Upside risks to inflation: The MPC minutes highlighted that allmembers remain concerned with regard to inflation trajectory, especiallyas the inflation prints for July and August indicated a broad-basedincrease in prices. The risks to inflation as per the MPC members stemsfrom risk of fiscal slippages, risks from commodity price spikes and geopoliticaluncertainty. The MPC members note that inflation expectationshave moderated; however, they still remain elevated and the downwardadjustment remains slow.

    Upside risks to inflation: The MPC minutes highlighted that allmembers remain concerned with regard to the inflation trajectory, andexpect inflation to remain above the 4% mark in the near term. The risksto inflation as per the MPC members stems from

    Getting more confident about rebound in growth: The members notedthat incoming growth data is pointing towards strengthening growthmomentum. Members seemed more confident about the recovery ingrowth and it not being just a base effect related increase in growth.

    Looking for further data to assess if slowdown in growth istransitory: The MPC members note that there is a slowdown in growth,especially as indicated by the GDP growth rate for QE June. However,to make a more certain assessment whether the slowdown in growth istransitory, the MPC is likely to wait for more data points. Commentsfrom Dr. Patra and Dr. Patel indicate that recent data points indicate animprovement in growth and growth outlook should be better in 2H FY18.

    (1) a turn in the globalcommodity price cycle, mainly the firming up of oil prices and geopoliticalrisks could further aggravate a commodity price rise,(2) anincrease in household inflation expectations in the latest round,(3) riskof fiscal slippages and (4) supply disruptions impacting vegetable prices.The committee is likely to assess the evolving inflation trajectory anddrivers of inflation very closely.

    What made the majority of the members vote for a pause despitehighlighting upside risks to inflation? The nascent growth recovery,which needs some support, has been cited as the key reason that madethe majority of the MPC members vote for a pause.

    Our view: Expect one more rate cut in FY18: We believe that the RBI facesa dilemma of managing a weaker-than-expected growth outlook and keepingthe inflation trajectory closer to its stated medium-term target of 4%. In thiscontext, the RBI is likely to be data-dependant to assess the evolving growth–inflation dynamics. Indeed, the CPI inflation for Sep-17 was lower thanexpected and indicated steady inflation rate (which was released post the RBIpolicy). In our view, inflation will likely hover sub-4% in 2H FY18, and growthrecovery is likely to be tepid (our estimates of growth are at 6.7% in FY18,7.2% in FY19), which creates room for one more rate cut of 25bp – we expectthe RBI to likely move in the December policy review.

    Data dependent to assess strength of a rebound in growth: TheMPC members note that incoming data on growth has shown a slightimprovement. However, the members remain extremely data dependentto analyze the underlying strength of the recovery. The members notedthat downside risks to growth could stem from weaker agricultureactivity (weak trend in Rabi sowing), upside in inputs costs (commodityprices) hurting firms’ margins, however, the committee also noted thatgrowth could be positively impacted by the favorable global growth,improvement in credit offtake with recapitalization of PSU banks.

    Our view – Extended pause, MPC to remain vigilant: We expect RBI tokeep policy rates on pause in 2018 as we expect inflation to moderatetowards 4% in 2HFY19 (from 5.3% in 1HFY19e). While inflation will remain onan upward trajectory in 1H18, growth recovery still remains nascent in ourview, keeping the balance in favour of a pause. While we do not expect a ratehike in 2018, we highlight the risk that a rate hike could be brought forward to2H 2018 driven primarily by inflation coming in higher than RBI’s expectationfor 2HFY19 (due to hardening of oil price/ significant pass through from MSPprice hikes / poor monsoon) and or better-than-expected growth conditions.

    Our view – Extended pause: We expect the RBI to keep policy rates on anextended pause going into FY19as inflation is likely be around 4.5% (barringvolatility due to base effect) and growth is expected to be on a gradualrecovery path. While we expect inflation will breach RBI’s stated target rangeof 4.3-4.7% for 2H FY18and edge higher in QE Jun towards 5.5% (driven bya low base), we expect the RBI to take into the account the idiosyncraticfactors impacting inflation and still a nascent growth recovery, which shouldkeep the central bank on hold (while it can sound incrementally hawkish giventhe inflation trajectory).

    Global factors such as the pace of policy normalisation by the US Fed andassociated impact on external stability could also force rate action by the RBI.

    Indeed as highlighted by MPC member Dr. Acharya in the minutes, “The nextfew months of inflation and growth data will be key to determining theevolution of policy rates. If growth remains robust and inflation prints continueto project headline inflation a year ahead well above the target, then a changein stance from "neutral" to "withdrawal of accommodation" might have to beconsidered.”

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