What the MPC debates show
There is clear divergence on how to tackle inflation but the transparency is welcome.
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has increased interest rates in five consecutive meetings between May 2022 and February 2023, administering a cumulative increase of 2.5 percentage points. When the last MPC announced its decision on February 8, most analysts expected the 25 basis point — one basis point is one-hundredth of a percentage point — hike to be the last one in the current cycle. However, an inflation print of 6.5% in January has sparked speculation that another rate hike is on the cards in April. To hike or not hike (interest rates) is the question the MPC will confront when it meets in April. Which way should it decide?
The minutes of its latest meeting — they were published yesterday — suggest that there was already a significant divergence within the MPC on the wisdom of raising interest rates even in February. The hawks — this includes the RBI governor and deputy governor in the committee — are concerned about core inflation and are convinced that bringing inflation down to 4% level is absolutely critical for protecting India’s medium-term economic interests. The doves — they are the two outsider academics professor Jayanth R Varma and Ashima Goyal — are warning the MPC that it should not be “complacent about growth” by underlining the fact that “raising real policy rates to reduce demand has a stronger effect on growth than it does on inflation”. By the time the MPC reconvenes in April, it will have the February inflation print and a better idea about the prospects of the winter crop, which, right now, is facing potential damage from the premature rise in temperatures. This newspaper believes that higher interest rates is an unlikely antidote to a crop loss-driven inflationary spike. That said, fiscal policy must do its bit to contain food inflation.
It is futile to guess which way the MPC will decide when it meets in February. However, it is reassuring that the committee that has been mandated with guiding India’s monetary policy is having a vibrant discussion rather than adhering to collective dogma in favour of one economic viewpoint or the other. While there are bound to be disagreements with almost all policy decisions, transparency about the ways in which they are taken is a positive for trust in the institutions which make these decisions. Indian policymaking could learn from the MPC model here.