Explore the detailed insights from the Minutes of the Monetary Policy Committee meeting held on February 6-8, 2024, with comprehensive coverage of key discussions on the economic outlook, policy decisions, and individual perspectives.
The forty-seventh meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) convened from February 6 to 8, 2024. All members were present, including Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, and Dr. Michael Debabrata Patra, with Shri Shaktikanta Das chairing the proceedings.
As per the RBI Act, the committee extensively deliberated on various economic indicators, surveys, and staff projections. Key areas of focus included consumer confidence, inflation expectations, corporate performance, credit conditions, and the outlook for different economic sectors.
After thorough discussions, the MPC resolved to maintain the policy repo rate under the liquidity adjustment facility (LAF) at 6.50%. Concurrently, other rates such as the standing deposit facility (SDF), marginal standing facility (MSF), and Bank Rate remained unchanged. The committee emphasized the importance of aligning inflation with the target while ensuring support for economic growth objectives.
The global economic outlook for 2024 was deemed stable, with inflation gradually receding from recent peaks. Domestically, economic activity exhibited strength, with GDP growth projected at 7.3% for 2023-24, primarily driven by investment. Looking forward, factors such as improved consumer consumption, private investment, and global trade integration were expected to sustain GDP growth at 7.0% for 2024-25.
CPI inflation rose to 5.7% by December 2023, primarily due to food inflation, while core inflation remained subdued. The trajectory of inflation would depend on variables such as food prices, the impact of monetary policy, and global crude oil trends. CPI inflation projections stood at 5.4% for 2023-24 and 4.5% for 2024-25, assuming normal monsoon conditions.
Individual Perspectives and Votes:
During the meeting, members expressed diverse viewpoints on economic conditions and policy actions. Dr. Shashanka Bhide emphasized sustaining growth momentum, while Dr. Ashima Goyal stressed the importance of maintaining the policy status quo. Prof. Jayanth R. Varma advocated for a reduction in the repo rate, while Dr. Rajiv Ranjan and Dr. Michael Debabrata Patra supported maintaining the existing policy stance.
Dr. Shashanka Bhide’s Perspective:
Dr. Shashanka Bhide provided a comprehensive analysis during the meeting, highlighting the robustness of domestic economic activity despite challenges such as adverse monsoon conditions, weak external demand, and geopolitical conflicts. He noted that real GDP growth for FY 2023-24 is estimated at 7.3%, exceeding the previous year’s 7.2%, with strong momentum continuing into the second half of the fiscal year. Various indicators like non-food credit, PMIs, and GST collections indicate strong demand conditions.
Dr. Bhide emphasized the importance of sustaining growth momentum, particularly in consumption demand, which relies on improved employment and household income conditions. He mentioned the recent improvement in consumer confidence and business optimism but cautioned about the need for cautious spending behavior.
Regarding inflation, Dr. Bhide discussed the factors contributing to headline CPI inflation, including food price inflation and the moderation of core inflation. He emphasized the significance of decelerating food inflation to achieve sustained inflation moderation. He also mentioned surveys indicating a decline in current and future inflation expectations among urban households.
Additionally, Dr. Bhide provided insights from enterprise surveys, reporting mixed price conditions across sectors. He highlighted an increase in inflation expectations reported by the Business Inflation Expectations Survey (BIES) and the RBI Survey of Professional Forecasters. Despite these factors, Dr. Bhide expressed confidence in achieving the inflation target while sustaining growth momentum.
In conclusion, Dr. Bhide voted to keep the policy repo rate unchanged at 6.50% and emphasized the need to withdraw accommodation gradually to align inflation with the target while supporting growth.
Dr. Ashima Goyal’s Perspective:
Dr. Ashima Goyal provided insights on the global and domestic economic scenario during the meeting. She noted that geopolitical risks persist, but oil prices haven’t surged as expected, and global growth hasn’t slowed significantly. Advanced economy central banks are cutting rates as inflation approaches targets, indicating nuanced actions for a soft landing. Indian growth has surpassed expectations, showing resilience to global shocks, although some high-frequency indicators softened recently.
Inflation in India has been below predictions, and core inflation is softening, suggesting output remains below capacity. Reforms and structural changes are reducing costs, and corporates are focusing on volume over price growth. Dr. Goyal emphasized that inflation is moving towards the target, which should anchor core inflation around 4%. Fiscal consolidation and better government expenditure composition will further ease inflationary pressures.
Dr. Goyal suggested maintaining the status quo on rates as growth remains robust and recent headline inflation nears the upper tolerance band. She advocated waiting to see if commodity price shocks persist before considering rate hikes. Supply-side improvements are necessary to reduce shocks, and measures to ensure the weighted average call rate (WACR) aligns with the repo rate are needed.
Additionally, Dr. Goyal highlighted the need for expanded measures to counter liquidity shocks and improve liquidity flow in the financial system. Banks tend to hoard liquidity when tight, impacting non-bank financial intermediaries’ ability to access credit. She emphasized the importance of macroprudential tightening to reduce balance sheet stress and the role of adequate liquidity in preventing insolvency risks.
Dr. Goyal concluded by citing examples of resilience measures, such as the decline in rupee volatility and FX forward premiums in the Indian foreign exchange market, indicating policy rate independence from US rates and attracting debt inflows.
Prof. Jayanth R. Varma’s Perspective:
Prof. Jayanth R. Varma expressed his views on the current economic situation during the meeting. He highlighted that while inflation is projected to average 4.5% in 2024-25, the current policy rate of 6.5% results in a real interest rate of 2%, which he believes is unnecessarily high to achieve the inflation target of 4%. He argued that despite robust economic growth, there is no evidence of overheating.
Prof. Varma disagreed with the notion that the output gap has closed and that the projected growth rate of 7% for 2024-25 exceeds India’s growth potential. He cited various policy measures and infrastructure investments that should enhance the economy’s growth potential. He also noted that the compound average growth rate of real GDP from the pre-pandemic level is relatively low, indicating resilience rather than significant permanent damage.
In his view, if the potential growth rate of the economy is around 8%, then a real interest rate of 1-1.5% would suffice to steer inflation towards the target. A real interest rate of 2% poses a risk of exacerbating growth pessimism. Prof. Varma emphasized that continued fiscal consolidation in 2024-25 creates room for monetary easing without triggering inflation.
He advocated for the MPC to take its dual mandate of inflation and growth seriously and to signal a commitment to maintaining an appropriate real interest rate. Therefore, he voted to reduce the repo rate by 25 basis points and to change the stance to neutral.
Dr. Rajiv Ranjan’s Perspective:
Dr. Rajiv Ranjan outlined his perspective on the economic situation since the last policy meeting. He noted that while growth is holding up better than expected, inflation has surpassed 5% in November and December, with notable signs of disinflation in core inflation. He found comfort in global economic improvements, including declining inflation in advanced economies and benign commodity prices, along with the government’s commitment to fiscal consolidation in the interim budget.
Dr. Ranjan voted to maintain the status quo on rates and stance for several reasons. First, he highlighted the substantial cumulative rate hikes undertaken by the MPC previously, contrasting with the less aggressive approach of central banks in advanced economies. Second, given the uncertainty surrounding the inflation trajectory and the need for clarity on crop conditions, maintaining the current stance seemed prudent.
He cautioned against market exuberance and emphasized the importance of consistency and credibility in monetary policy to anchor inflation expectations. Dr. Ranjan stressed the delicate transition period, where premature policy changes could disrupt market expectations. He advocated for caution and conservatism in managing the present economic scenario, relying on India’s strong fundamentals to navigate the challenges effectively.
Dr. Michael Debabrata Patra’s Perspective:
Dr. Michael Debabrata Patra highlighted the sustained momentum in domestic economic activity, supported by a shift towards investment. While private capital expenditure is yet to gain full momentum, factors such as high corporate profitability and a strong commitment to fiscal consolidation are expected to bolster its onset. Despite global uncertainty, the productive capacity of the economy is expanding, largely funded domestically, reducing vulnerability to external financial flows.
However, private consumption, especially in rural areas, is constrained by elevated food inflation. Dr. Patra emphasized the importance of restraining inflation to ensure inclusive and sustained growth. He noted that food supply pressures continue to impede disinflation, despite steady easing in core inflation. While consumer and business sentiment indicators are positive, aligning inflation with the target is crucial for sustaining optimism.
Dr. Patra underscored that high inflation erodes purchasing power, particularly affecting vulnerable groups. He advocated for maintaining restrictive monetary policy to exert downward pressure on inflation while minimizing output costs. He voted to keep the policy rate unchanged and continue with the stance of withdrawing accommodation until inflation subsides and remains close to the target consistently.
Shri Shaktikanta Das’s Perspective:
Shri Shaktikanta Das commended India’s strength and resilience amidst global challenges, attributing it to proactive and calibrated policies. He emphasized the importance of maintaining macroeconomic and financial stability as foundations for sustainable and inclusive growth. Real GDP growth for 2023-24 is projected at 7.3%, with inflation expected to soften to 5.4%. Despite intermittent food price shocks, core inflation has steadily decreased, reaching a four-year low of 3.8%.
Looking ahead, GDP growth is expected to remain resilient in 2024-25, supported by robust economic activity, improved rural consumption due to better rabi sowing, and strong urban demand. Private capital expenditure has increased, bolstered by government infrastructure initiatives and favorable corporate and banking conditions. Manufacturing and services sectors are upbeat, contributing to a projected 7.0% GDP growth in 2024-25.
Das stressed the importance of maintaining vigilance in monetary policy to navigate the “last mile” of disinflation successfully. Premature policy moves may undermine progress achieved so far. Therefore, he advocated for keeping the policy repo rate unchanged and continuing the focus on withdrawing accommodation to achieve the 4% inflation target while supporting growth objectives.
Conclusion and Next Steps:
The MPC’s decision reflected a balance between managing inflation and supporting economic growth amid domestic and global uncertainties. Minutes of the meeting will be published on February 22, 2024. The next MPC meeting is scheduled for April 3 to 5, 2024, providing an opportunity to reassess economic conditions and policy strategies.
With the discussion concluded, the meeting adjourned on February 8, 2024, with a commitment to continued vigilance in addressing economic challenges and achieving policy objectives.