RBI’s Monetary Policy Committee (MPC) has been revamped with three brand new external members appointed by the union government. The are: Ram Singh, Saugata Bhattacharya and Nagesh Kumar. Now all eyes are on the new members’ stance on policy rate and stance.
This is especially important given the current VUCA (Volatility, Uncertainty, Complexity, Ambiguity) environment, which is marked by unstable and fluctuating economic conditions.
The RBI Act was amended in 2016 to provide a flexible inflation-targeting framework in the country. The amendment also provided for a statutory framework for an MPC to make decisions about the policy rate to achieve the inflation target. As per the provisions of the amended Act, the MPC consists of three internal and three external members.
The internal members are the Governor of the RBI as the chairperson, the deputy governor in charge of monetary policy and one officer of the RBI to be nominated by the Central Board of the RBI.
How well has the outgoing MPC fared in achieving the inflation target? This was the second MPC since the inception of the inflation-targeting framework. It was constituted in October 2020. It first met on 9 October 2020, and the last meeting was on 8 August 2024. During its tenure, the economy was subject to multiple shocks, such as a pandemic (COVID-19) and geopolitics (the Russia-Ukrainian conflict).
The first few months of the second MPC were marred by inflation breaching the upper threshold of six per cent due to the COVID-19 pandemic-related disruptions. After a brief moderation in 2021, inflation rebounded in 2022 due to a global commodity price hike beginning the Russia-Ukrainian conflict.
During the tenure of the second MPC, the RBI officially struggled to control its inflation target. According to the RBI Act, the RBI is deemed to have failed in its inflation targeting objective if the headline CPI inflation falls below two per cent or exceeds six per cent for three consecutive quarters. This condition materialised in 2022 when inflation breached the upper threshold of six per cent for three quarters from January to September 2022.
The elevated food, fuel and core price levels kept inflation elevated in 2022. In 2023, inflation moderated due to the easing of fuel prices and core inflation. In the last two months, inflation eased below the four per cent mark.
One of the key strengths of a committee-based monetary policy process is that it brings a diversity of views and perspectives to the decision-making process. In particular, the external members of the MPC are expected to bring diverse opinions to the table, thus enhancing the decision-making process. In the MPC setting, the decision is made based on votes by the members of the MPC. The members can dissent against the resolution.
The dissent can be on the policy rate as well as on the stance. The first instance of dissent on the policy rate in the MPC with outgoing external members happened on 30 September 2022.
On the stance, there have been instances of reservation as well as outright dissent. In the last two meetings, the two external members voted against the unchanged policy rate. They were in favour of a cut in the policy rate. They also voted against the withdrawal of the accommodation stance and instead voted to change the stance to neutral. The dissenting members contented that growth is below potential and a sustained high real interest could dampen growth with a lag.
Within this context, the MPC may need to have greater deliberations on growth-inflation trade-off, potential growth and real interest rate trajectory, as well as when it could become a dampener to growth. Hopefully, the new MPC will have more discussions and debates on these nuanced issues.
Worldwide, many of the central banks have commenced their rate-cutting cycle. In addition to the US Federal Reserve and the European Central Bank (ECB), the Bank of Canada, the Swiss National Bank, Sweden’s Riksbank and the Reserve Bank of New Zealand, to name a few, have also announced policy rate cuts.
In addition to the rate cuts by global central banks, two significant developments will likely shape the deliberations of the new MPC. One, crude oil prices have witnessed a decline in September to around $70-73 a barrel.
A stronger supply outlook and weak global demand, as well as the escalation of the Iran-Israel conflict, are likely to keep the crude oil price volatile. The trajectory of global crude oil prices is a critical input in the RBI’s inflation outlook.
Second, there are signs of a slowdown in various high-frequency indicators, pointing to softer growth. Passenger car sales, cement production and steel and petroleum product consumption have shown weaker growth in recent months. The Manufacturing Sector Purchasing Managers’ Index (PMI)—a key gauge of manufacturing sector activity—has been ebbing since June 2024 due to lower growth in output and new orders.
The key engines of growth in bank credit—personal loans and services—also has witnessed moderation since last month. While the overall non-food bank credit growth was roughly hovering at 15%, personal loan growth has moderated to 16.8 per cent at the month’s end of August as compared to 18.3% the same year ago.
The slowdown in the personal loan segment is largely due to a sharp fall in credit card debt. Credit to services also witnessed a sharper slide to 15.6% from 21.0% a year ago due to lower credit to the Non-Banking Financial Company (NBFC) segment. While part of the slowdown can be due to regulatory tightening measures announced by the RBI last year, the easing of credit growth is perhaps also a signal of weak urban discretionary demand.
The general outlook on the core inflation and growth amid a VUCA global environment and ever changing macro landscape will be observed keenly over next week’s reconstituted MPC meeting.
(The authors are academics & VUCA experts; Views are personal)
