Informist, Monday, Jun 24, 2024

--MPC Bhide: Fall in real rates due to CPI rise not useful currently

--CONTEXT: MPC External Member Shashanka Bhide's remarks in interview

--MPC Bhide on stance: Assessing CPI trend for another qtr valuable

--MPC Bhide: Clear policy stance needed for sustained moderate CPI

--MPC Bhide: Policy stance consistent with policy cycle continuation

--MPC Bhide: Always a possibility of stance change at next MPC meet

--MPC Bhide on monsoon: We should certainly be watchful at this point

--MPC Bhide: Growth momentum in FY25 significant at this point

--MPC Bhide: Policy rate not lone trigger for accelerating growth

--MPC Bhide: CPI projections don't show sustained decline to 4% aim

--MPC Bhide: Favourable external demand important for growth momentum

By Aaryan Khanna

NEW DELHI – External member of the Reserve Bank of India's Monetary Policy Committee Shashanka Bhide said that a likely rise in consumer inflation in the second half of 2024-25 (Apr-Mar) would lower the real interest rate, which would not be useful for the current position of monetary policy. He favoured holding rates as inflation rate projections do not show a sustained decline to the central bank's aim of 4%.

"I also believe that decline in real rates by a rising inflation rate would not be useful at this point," Bhide told Informist in an email interview after the release of the minutes of the June MPC meeting on Friday. "We need to sustain the expectations of moderating inflation rate to the target."

Bhide has been wary of the rise in the inflation trend in Oct-Mar for several months now. The RBI projects CPI inflation to fall to 3.8% in Jul-Sep, before rising to 4.6% in Oct-Dec and 4.5% in Jan-Mar. Headline inflation has not been at 4% or lower in any month since October 2019.

At the June policy review two weeks ago, Bhide voted with the three RBI members to keep the repo rate unchanged at 6.50%, and the monetary policy stance at "withdrawal of accommodation". The other two external members on the panel--Jayanth Varma and Ashima Goyal--voted for a rate cut of 25 basis points. Both said that high real interest rate of 2%--the repo rate net of projected CPI inflation for 2024-25, 4.5%--was hurting India's economic growth in the current fiscal year.

"To me, the trigger for accelerating growth is not the policy rate alone. But a clear policy stance will be needed to achieve a sustained moderate inflation rate," said Bhide, an honorary senior adviser at the National Council of Applied Economic Research, said.

Favourable external demand was also important to sustain the current growth momentum, according to Bhide. Meanwhile, another quarter of gauging inflation trends would be valuable guidance on whether to change the stance, the external member said. For Bhide, the stance is consistent with the current monetary policy cycle and maintaining the policy rate at its peak. The MPC had raised the repo rate from a record low of 4.00% by 250 basis points between May 2022 and February 2023.

When asked whether all six members could vote for a change in policy stance to "neutral" at the next monetary policy review in August, Bhide replied, "There is always a possibility."

So far, it was important for the MPC to be watchful of the monsoon but it was too early to gauge its impact on the projected growth-inflation trend, Bhide said. This monsoon season, the country has received 82.3 mm rainfall till Friday, 17% below the long-period average, government data showed.

Following is the full transcript of the interview, edited only for grammar, in which Bhide also looks back at his tenure in the committee, which is scheduled to end before the October policy review:

Q. The monsoon has made disappointing progress in the two weeks since the last MPC meeting. Are the risks to the RBI's growth-inflation projections growing?
A. It is early to make an assessment on the impact of the present deviations to the predicted trajectory of growth and inflation. Weather and climate related uncertainty has always been a feature of projections of agricultural output and the impact on inflation. We should certainly be watchful at this point.

Q. As long as a growth shock doesn't occur, do you see any reason to soften the current policy stance in the next meeting?
A. There has been a moderating trend of headline inflation. The projected inflation rate for H2: 2024-25 (Oct-Mar) shows an upturn after the sharp decline in Q2 (Jul-Sep). An assessment of the inflation trends for another quarter would be a valuable guidance.

Q. You're a little bit of a black sheep among external members now, considering both your non-RBI colleagues on the MPC are keen on cutting the repo rate. In your view, is the 2% real rate for 2024-25 going to hurt growth at all?
A. The growth momentum, with a projected GDP growth of over 7% in 2024-25, is significant at this point, and the inflation rate projections do not show a sustained decline to the target. To sustain the growth momentum, it is also important to have favourable external demand conditions. I also believe that a decline in real rates by a rising inflation rate would not be useful at this point. We need to sustain the expectations of moderating inflation rate to the target.

Q. RBI Executive Director Rajiv Ranjan says caution is important in this transition phase. External Member Goyal says "status quoism" may aggravate shocks. What's your thinking, in terms of caution versus action?
A. We now have a projected course of growth-inflation trajectories and an assessment of the risks in the short to medium term. To me, the trigger for accelerating growth is not the policy rate alone. But a clear policy stance will be needed to achieve a sustained moderate inflation rate.

Q. Do you agree with the RBI's description of the "withdrawal of accommodation" stance? What does it mean to you at the current juncture?
A. It is a part of the resolution for the June meeting, consistent with the continuation of the policy rate, a peak in the present cycle.

Q. Do you think a compromise on softening the stance can be brokered between the six members at the next policy meeting, if a normal monsoon pans out?
A. There is always a possibility.

Q. You're heading into your last scheduled MPC meet, in August. What are your takeaways from the policymaking experience? Does the MPC need changes to become either more proactive or reactive?

A. It has indeed been a unique privilege for me to be in the MPC. It has also been a humbling task to be in the decision-making process that affects the economy in a fundamental way. I believe that the MPC would set policies affecting the future inflation trajectory.

End

Edited by Akul Nishant Akhoury

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