The fifth meeting of the Monetary Policy Committee (MPC) held on June 6 and 7.
For the first time, it broke with unanimity and also went against widespread industry aspirations of a policy repo rate cut.
What is the background of the issue?
The unanimous approach towards the rate cuts has been replaced by an exchange, if not a clash of contrary views.
The concern is of members now doing their own leap, coming as they do from different backgrounds, so that divergent.
The members placed on record that the readings on “a clear declining trend” in inflation.
Contrary to that of the RBI, as actual inflation had turned out to be lower than the latter’s projections.
There is a wait and watch scenario in the decisions made.
What are the concern with the decisions taken?
The question on how the meeting is likely to influence market perspectives, particularly since there isn’t any clear forward guidance provided as a holistic view of the Committee as a whole.
There remains a larger risk of a policy decision arising out of a melange of views that prosecute individually held or ideologically driven opinion.
The “output gap”, which is the actual output minus potential output, and is an important measure to help a central bank assess short-run inflationary pressures.
A negative gap calls for an expansionary monetary policy, which in this case means a policy repo rate cut.
An output gap calculated on data for 2016-17 that profile a slowdown will, by definition, be negative and wider than otherwise.
For an economy that is projected to grow at 7.3 per cent in 2017-18, however, it must be the case that the output gap would narrow and close.
These are very divergent views, and they might indicate a reiteration of held positions, rather than a discussion in which the two convince each other.
What is the way forward?
The quiescent investment cycle remains a key macroeconomic concern and there are most critical aspects of the monetary policy.
Even if a rate cut is offered, a likely scenario is that banks will not reduce the lending rate, or make very minor changes and will take up the “wait and watch” approach.
But they will be tempted to cut the deposit rate further, this brings some unintended and undesirable results for a policy that is meant to boost the dormant investment cycle.
The members are in hurry for a policy repo rate reduction, mirroring what possibly is a view that is usually said to be held by the government wanting a booster for the economy.
Hence there is a good clash of ideas building up, bringing a new kind of dynamic to the RBI.
