‘The rate hikes started in May 2022 and cumulatively there is a significant increase in policy rate (250 basis points)’
Shashanka Bhide
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In February, Shashanka Bhide was the only external member of the Monetary Policy Committee (MPC) to vote in favour of a rate hike. In the April policy meeting, he changed his decision to go with the consensus of a pause. He explains the rationale in an interview with Asit Ranjan Mishra. Edited excerpts:
Before we get into the details, could you explain for the readers how the MPC arrives at a decision? Do you come prepared with your written views on Day 1 of the meeting?
Day 1 is essentially for presentations by the RBI and discussions. Day 2 is for discussing decisions. It is spread over a two-day period and final decisions are taken at the end of the two-day programme. People explain why they are voting for a particular decision but the written statements are provided later. We donтАЩt always meet on Day 3 but it (the resolution of the MPC) is confirmed with each member on Day 3. Except during the Covid, physical meetings are being conducted. The issues are discussed and decisions are taken. I canтАЩt say more than that.
You were the only external member who supported a rate hike in the February MPC meet. I presume MPC members didnтАЩt have access to the March CPI numbers when they met earlier this month which showed inflation falling below 6 per cent. Then what materially had changed between February and April that you had to vote for a pause?
The rate hikes started in May 2022 and cumulatively there is a significant increase in policy rate (250 basis points). It is usually expected that the impact of policy decisions happens with a lag of time. The basic decision was to give some time and see the impact of what is happening. As you know, inflation did come down in November and December also below 6 per cent. The key issue is we are looking for decline in inflation rate in a sustained way. Projections for 2023-24 are also for headline CPI inflation rate of less than 6 per cent now. ThatтАЩs why it was probably appropriate to consider what the trends are on inflation going forward. There is data that suggest expectations of inflation are probably becoming more moderate. Going forward, the base effect is towards moderating inflation. There is probably material to suggest that the inflation rate is expected to moderate. Given that, a rise in rate or any other decision didnтАЩt seem appropriate. Then, of course, there is the issue of whatтАЩs happening to growth. Global scenario doesnтАЩt look very good. It is in this sense, between our February and April meeting, these were some of the issues that required some consideration.
Before February, the MPC had cumulatively increased rates by 225 bps and external demand shock was well known. Another 25-bp hike in February wouldnтАЩt have made a significant difference. Why didnтАЩt the MPC pause in February?
In the February meeting, we had two months of decline in inflation rate in November and December but in January it went up again. As you know, there was a divergent view in February. There is a considerable risk attached to both growth and inflation. It was time to pause and see how things develop. There is obviously scope to go the other way but it was appropriate to take a pause now. Even if we take the time up to August, there was an increase in policy rate of about 1.75 per cent. The remaining rate hikes happened after that. We should begin to see the effect of the decisions after four-five quarters.
While deciding to pause, the RBI also increased its growth projection to 6.5 per cent from 6.4 per cent for FY24. So it doesnтАЩt seem growth concerns increased between February and April policy meetings.
On growth, there is certainly a concern. The increase in growth assumption from 6.4 per cent to 6.5 per cent was one because of the (change in) assumption of crude oil prices. It is a higher growth, but it is not significantly higher. At least to me, on the growth side there are downside risks.
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