RBI MPC Minutes: MPC would run the risk of being considered neither current nor relevant!

Dr Ravindra Dholakia, MPC member does not mince words. His latest statement in the minutes of the MPC held in Dec-2018 is worth highlighting (HT: Avinash Tripathi for the pointer):

Drastic and sudden changes in external economic environment have taken place after the last meeting of MPC in October 2018. Should these changes evoke a response through an appropriate policy action? – yes, if they are not purely temporary and have reasonably long term impact on the economy. RBI’s own downward revision of the forecast of inflation 12 months ahead to a substantial extent in response to those developments, is a clear indication of their long-term impact on the economy. Thus, a policy response is called for. If there is no policy action in response to such a major favourable shock, MPC would run the risk of being considered neither current nor relevant!

With inflation forecast coming down by around 120 basis points and quarterly growth forecasts marginally revised downward opening up output gap going forward, there is hardly any justification in retaining calibrated tightening stance. In my opinion, this would be the right time to cut the rate and bring the unduly high real interest rates in the country back to around 2 per cent. It was, however, unfortunate that in October 2018, MPC had changed its stance to calibrated tightening with 5:1 majority despite my unsuccessful persuasion to maintain neutral stance. As a result, any rate cut is off the table for now and any such action would not be advisable at this point. The best we can do under the circumstance is to hold the rate, but change the stance to neutral to take care of all possible uncertainties. We should not deny any possibility of either a rate cut or a rate hike in the near future depending on data coming in.

43. More specific reasons for my vote on the rate and the stance are:

  1. While the MPC resolution points largely to the upside risks to the RBI’s inflation forecasts, there are downside risks that cannot be overlooked: Oil price uncertainties are on both the directions; Qatar has opted out of OPEC and it can set a trend for others; OPEC meeting can go either way; the ultimate impact on oil prices would be determined by faithful implementation of its decision by all members; and role of USA in this matter cannot be ignored.
  2. Similarly, Federal Reserve has practically changed its stance on rate hikes in future. Moreover, the USA economy is not likely to be very strong over time consistently.
  3. Fiscal slippage is possible but the extent of it may not warrant any panic because its impact on inflation may not be significant and will be felt, if at all, with a considerable lag.
  4. Real interest rate in the economy is very high. Even ignoring the issues concerning upward bias in the current measurement of inflation, it is substantially in excess of 200 basis points and is one of the highest in the world.
  5. Although the MPC resolution says that inflationary expectations one year ahead as per the latest RBI survey is constant compared to the previous survey, most of the 18 cities surveyed show a decline in the household inflationary expectation one year ahead. Only a few cities show an increase that neutralizes the decline observed in majority of cities. This brings to the fore the measurement issue for inflationary expectation in quantitative terms. We should be looking at the inflationary expectations of households not only in the urban cities but also in the smaller towns and the rural areas where inflation has come down significantly in recent times. In all likelihood, their inflationary expectation would be declining. Moreover, as I have argued elsewhere (EPW, Nov. 17, 2018), there is a need to consider expectation of businesses about the CPI headline inflation. The IIMA survey on them shows a marked decline of about 30 basis points. Thus, in the aggregate, the inflationary expectation in the country as a whole one year ahead seems to be declining and not remaining the same.

44. Under such circumstances, retaining the stance of calibrated tightening seems totally inconsistent and unjustified. All these points require a change in the stance from calibrated tightening to neutral to take care of several uncertainties on both sides so that a rate decision can be appropriately data driven in future.


No other member said anything on real interest rates. Interesting times.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: