After the first monetary policy statement of the newly-constituted Monetary Policy Committee (MPC) which announced a modest 25 basis points cut in repo rate to 6.25 percent early this month, much hype and hoopla surrounded the minutes of the meeting of the six-member Committee.
With the apex bank having laid the minutes of its MPC meeting on its website on October 18, the stance of the six members of the MPC appears to be on predictable lines as if they were all set to signal a shift from the policy restraint and nuanced approach adopted by former Governor Dr Raghuram G. Rajan. There was unsurprisingly total unanimity in whittling down the policy rate a tad lower with the apex bank nominees not desisting from voicing their vexations over upside risks to inflation.
The seven-page minutes with individual members vindicating their vote makes for a revealing read on their understanding and an underlying commitment to steer monetary policy. This is supervening at a time when the interminable trade-off between growth and inflation is bound to tax all their combined acumen and accumulated wisdom.
Political masters have undoubtedly done their due homework by putting in place an inflation target monetary policy to be guided by the MPC. But if the same politicians in their immoderate desire to achieve growth start giving gratuitous instructions or do back-seat driving on policies made by technocrats of the MPC, conflicts would ensue between the hawk of inflation-controllers and the dove of growth advocates.
Predictably, the government nominees on the MPC did not disappoint the authorities by focusing on the sputtering recovery in growth and the overarching need to bridge the output gap to avail of the sufficient slack to rev up activities in the real sectors of the economy by making credit a bit affordable to productive sectors. Though liquidity was never an issue with its ample availability, it is the cost of borrowing that had deterred accessing bank credit by people in sore need of funds for their business, industry or any other worthy economic activity.
But with an inflation target of 4 percent plus or minus two percentage points as the set limit, the Central bank has a greater responsibility thrust on it for any departure of actual inflation from the permissible range. Hitherto monetary policy statements were inured to sanctimoniously shift the blame on lax fiscal policy for price pressures or supply shortages that could be rectified by executive action. But this luxury is no longer available as any target overshoot on the inflation front invites criticism of the apex bank for its failure to stand guard on the price front! Thus the inability to meet the inflation target is construed as a crossing of the upper tolerance level of 6 percent for any three consecutive quarters.
Despite such a statutory definition of failure notified through gazette, the jittery representatives of the apex bank in the MPC might have been goaded by an uncommon dash to go along with the rest of the MPC for a modest cut even at its very first inaugural meeting! Lest even their modest support to policy easing should brand them as going with the wind of growth-seekers and being alive to their primary remit as the watchdog on the price front, the RBI Governor and Chairman, MPC Urjit Patel and Executive Director Michael Patra must perforce have to draw the attention to the upside risks to inflation. Patra ran into rhapsody, remarking that “even as inflation has been moving down in relation to the second and third bi-monthly projections, this is not to say that the beast has been beaten, or it’s back broken, but there is a turn in its momentum that is exploitable”. Here one can detect justification for a rate cut and the contrition in the admission that the demon of inflation is yet to be slain!
Is the return to easing cycle with the repo rate standing at its lowest since January 2011 sustainable, given the inflation outlook as cautioned by the MPC about the potential impact on house rent of the 7th Pay Commission allowances for central government employees to be followed by legions of state government employees? This coupled with the declared 42 percent increase in minimum wages by the Union government and its repercussions on the rest of the farm sector through the minimum support price hike, could not be set aside. So, inflation continues to be an imponderable in an uncertain growth journey with policy analysts wistfully hoping that the succeeding MPC minutes would throw greater clarity and crystalline analysis on the justification for policy rate flexibility by each erudite member.
Most dispassionate analysts legitimately opine that under an inflation-targeting model how a rate cut could be vindicated especially when the projected inflation over the next six months is close to the upper limit of six percent and the projected GDP growth is close eight percent. What is surprising is that the decision was unanimous to cut the rate which would call into question whether all relevant issues were debated and discussed by the MPC, as the detailed information with due analytics by each member to back their conclusion, have not been put on the website to draw any meaningful message.
Policy wonks maintain that the transmission of monetary policy through rate cut would continue to remain patchy with banks fiercely protecting their operating margins in the light of the unsolved estimated Rs 13.3 lakh crore of stressed assets/ non-performing assets (NPAs) of the banking industry.
Unless the various measures under way such as corporate debt restructuring (CDR), Strategic Debt Restructuring (SDR) and the latest Scheme for Sustainable Structuring of Stressed Assets (S4A) have begun making even modest headway to lessen the massive debt burden, the flow of credit growth to the productive segments of the economy and the concomitant revival of investment activity would remain a will-of-the-wisp proposition to drag the economy further into the morass of myriad problems.
(The views expressed are strictly personal.)