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Thursday, February 23, 2017

RBI minutes of meeting - Was RBI unanimous in its monetary policy?

The Reserve Bank of India released the minutes of the third meeting of the Monetary Policy Committee (MPC). In that meeting two important decisions were made. Firstly, the rates were left unchanged and second the stance was changed to "neutral" from "accommodative". While the first was in the deliberation set of the market, the second truly spooked the market. Markets were not expecting a change of policy stance. There was speculation about if the decision was, in fact, unanimous or not.

Well, the minutes do not give us that clarity. Indian mentality is to deliberate and discuss the differences and then once consensus is reached, the decision is "unanimous". The deliberations and differences are left out of the public statement. 

The statement includes this explanation as such:

3] According to Section 45ZL of the amended Reserve Bank of India Act, 1934, the Reserve Bank shall publish, on the fourteenth day after every meeting of the Monetary Policy Committee, the minutes of the proceedings of the meeting which shall include the following, namely:–
(a) the resolution adopted at the meeting of the Monetary Policy Committee;
(b) the vote of each member of the Monetary Policy Committee, ascribed to such member, on resolutions adopted in the said meeting; and
(c) the statement of each member of the Monetary Policy Committee under sub-section (11) of section 45ZI on the resolution adopted in the said meeting.
In effect, the minutes of MPC are nothing but public statement or press release for the MPC and is duly sanitised. It does not state of any differences between the MPC members. Nevertheless, the committee seems to have been unanimous on both the aspects of the decision. The committee has made some important statements: [formatting changes for improved readability are mine]

On Inflation 
It is important to note three significant upside risks that impart some uncertainty to the baseline inflation path – 
  • the hardening profile of international crude prices; 
  • volatility in the exchange rate on account of global financial market developments, which could impart upside pressures to domestic inflation; and 
  • the fuller effects of the house rent allowances under the 7th Central Pay Commission (CPC) award which have not been factored in the baseline inflation path.  
The focus of the Union budget on growth revival without compromising on fiscal prudence should bode well for limiting upside risks to inflation. 

On GVA growth 
GVA growth for 2016-17 is projected at 6.9 per cent with risks evenly balanced around it. Growth is expected to recover sharply in 2017-18 on account of several factors. 
First, discretionary consumer demand held back by demonetisation is expected to bounce back beginning in the closing months of 2016-17. 
Second, economic activity in cash-intensive sectors such as retail trade, hotels and restaurants, and transportation, as well as in the unorganised sector, is expected to be rapidly restored. 
Third, demonetisation-induced ease in bank funding conditions has led to a sharp improvement in transmission of past policy rate reductions into marginal cost-based lending rates (MCLRs), and in turn, to lending rates for healthy borrowers, which should spur a pick-up in both consumption and investment demand. 
Fourth, the emphasis in the Union Budget for 2017-18 on stepping up capital expenditure, and boosting the rural economy and affordable housing should contribute to growth. 

The Committee inflation and growth expectations are mapped as follows:

The forecasts do lend legitimacy to the neutral stance. The statement includes emphasis on "caliberated approach" to achieve the 4% target. Urjit Patel clarified that neutral stance implies that rates can move any direction. Thus, in effect turns out to be quite benign policy.