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Informist, Wednesday, Oct. 9, 2024

 

By Siddharth Upasani

 

MUMBAI - The Reserve Bank of India's Monetary Policy Committee has always had one 'dove'. From 2016 to 2020, it was external member Ravindra Dholakia. In the second committee, it was arguably Jayanth Varma. In the newly-constituted MPC, it is probably Nagesh Kumar, director and chief executive of Institute for Studies in Industrial Development.

 

In his first meeting as a member of the rate-setting panel, Kumar turned out to be the only one to vote for a reduction in the policy repo rate, calling for a 25-basis-point cut to 6.25%. As has often been the case in the MPC's eight-year history, an external member was again in the minority when it came to voting on the interest rate, with the rest of the committee in favour of leaving the policy rate unchanged at 6.50%, although the decision to change the stance of the policy to neutral on Wednesday was unanimous.

 

Little was known of Kumar's views on inflation and interest rates ahead of the MPC meeting, with the new committee appointed only on Oct. 1. What was known--or at least was thought to have been known--was that fellow external member Saugata Bhattacharya was likely to be the most dovish of the three new appointments on account of a newspaper column he had written in August in which he argued for lower interest rates. Bhattacharya, however, went with the majority on Wednesday.

 

The pigeonholing of interest-rate setters as hawks or doves is probably not appropriate given the complex choices they must make before arriving at their decision; the choice is often not black and white, and the distinction should be far more nuanced.

 

The real determinant of whether a rate-setter is a hawk or a dove is how they react when presented with growth-inflation trade-offs. In times of a demand shock--good or bad--there is no real trade-off as the inflation and growth objectives can be met by either reducing or increasing interest rates: a jump in demand and the resultant higher inflation can both be wrestled down by a rate hike while a demand slump and a fall in inflation that would accompany it can be tackled by bringing down the interest rate. So, MPC members truly face a trade-off when there is a supply shock and they must choose how much of growth they are willing to sacrifice to bring inflation to target.

 

"You become a dove or a hawk depending on where you stand in that trade-off--how much you want to bring down inflation and how much output loss are you willing to incur," former external member Chetan Ghate had told this reporter back in 2021.

 

At the moment, with no significant supply shock apparent--except seasonal disturbances in the agricultural sector--it is difficult to put an avian tag on Kumar, Bhattacharya, or Ram Singh. Perhaps the minutes of this week's meeting, scheduled to be released on Oct. 23, will make matters a little clear. Or maybe they won't, considering the MPC has now moved to a 'neutral' stance and is closer to cutting interest rates.

 

For those waiting for the RBI to cut rates, Kumar's decision Wednesday is welcome in that it provides greater information about the new external members. Assuming Saugata Bhattacharya's views haven't changed dramatically from what he wrote in August, the presence of at least two members--the jury hasn't even assembled yet as far as Ram Singh is concerned--on the MPC who think lower interest rates are needed, will be of comfort to the markets. It also offers some degree of continuity from the previous set of external members, with Ashima Goyal and Jayanth Varma both having been in the rate-cut camp in the August meeting.

 

All MPC members, past and present, would argue that they are data-dependent. And while that is true, any leanings or signs of preferences are unlikely to be ignored. Kumar has opened the door to being termed a dove. Whether he truly is, of course, will only be known later.  End

 

Edited by Vandana Hingorani

 

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