Minutes of the MPC meeting show that members did acknowledge the space to cut rates in the August meeting, but ongoing transmission from previous cuts, uncertainty stemming from US trade tariffs and uncertainty in food inflation nudged members to vote for a pause. Below is the interview with ET of external MPC member Saugata Bhattacharya after the release of MPC minutes.
Q: Minutes of the August meeting shows more open discussion was the possibility of rate cut whereas the MPC statement was interpreted as leaning more towards hawkish. What would be your message to the market who had expected a pause along with a dovish tone?
A: At the outset, my usual disclaimer. Comments are my opinions, not of the MPC.
I don’t think it is a secret that all options and alternatives and their implications are intensively discussed at the MPC meetings. The neutral policy stance was adopted to preserve optionalities. A former RBI Governor said a central bank should never say never; same with monetary policy. My statement said, “Given this level of extant and evolving uncertainty, it is difficult to provide even a modicum of forward guidance. [My] policy decisions will continue to be based on incoming data and be taken on a meeting-by-meeting basis”.
Q: The market is in a liquidity glut and CRR will only put pressure on banks to deploy funds, at a time when supply is not being absorbed, especially at the long end. How do you respond to criticism that the MPC overdid instead of sequencing it well?
A: Management of system liquidity is beyond MPC’s purview, but this is crucial to the primary objective of transmission of policy rate decisions to multiple interest rates. However, I will say that RBI has deftly managed system liquidity, deploying various instruments to maintain the operating and other short-term rates at levels consistent with monetary policy. The pre-emptive CRR cuts will help to stabilise system liquidity in the coming months when there is expected to be multiple drains on the surplus. And the instruments to calibrate liquidity levels are still available.
Q: The announcement to reform the GST structure shows that growth is the government's priority even at the risk of potential fiscal slippage. Do you think this will have to be complemented by monetary easing? How do you balance this given that inflation on the horizon is forecast to be above 4%?
A: In principle, monetary policy is always ready to support growth, but not at the cost of price stability. The proposed GST rate slab transition changes should initially result in a fall in prices of most goods and services. However, with the higher disposable incomes likely to incentivise consumption demand, the second-round effects of output, investment and growth on the prices of at least some goods and services are difficult to predict.
The eventual effects of GST re-structuring on indirect tax collections and on the fisc needs to be kept in mind. This will impact market interest rates. In addition, the effects of transmission of repo cuts and liquidity infusion into lending rates and subsequently on credit demand also remains to be seen. A higher credit offtake will certainly complement a fiscal policy stimulus.
Q: Yields have surged and SBI has raised the upper band of home loan rate– which can be seen on the margin as a rate hike – do you think the abrupt shift to neutral stance was an error?
A: The reversion to the neutral policy stance at the June policy meeting was a deliberate decision to signal that, post a front loaded rate cut, continued policy easing was not a given; a pause was also an option. The rise in, say, the 10-year bond yield follows a pattern of bond markets’ reactions on nearing a perceived end of the policy cycle. In addition, keep in mind the earlier rally, when the yield had fallen by almost 55 bps over March to June. And the bulk of the subsequent rise was not post the June policy (when the stance was changed), but the recent one. In short, there are multiple factors behind rate moves.
I will not comment on specific institutional decisions. However, bank flexible home loan rates are now external benchmark linked and will have fallen by the same amount as the repo rate. Adjustments of the spreads might moderate the rate cut, but those are business calls.
Q: In the context of tariffs uncertainty and muted global growth, will India have to settle for lower than its aspirational growth rate? In the past, strong growth phases had a strong correlation with rising exports. Do you think the RBI will have to consider lowering rates towards the end of the calendar year, or will it be pushed further?A: Periods of uncertainty and adversity have historically been catalysts for structural reforms in India, which have been ongoing for many years. I hope the momentum for deeper structural reforms accelerates. As I mentioned at the outset, it is impossible to provide any forward guidance given the elevated uncertainty. All policy options remain on the table, with the constraints of balancing the various trade offs guiding the policy response path. The impact of the external environment on growth will certainly be a consideration.
Q: Minutes of the August meeting shows more open discussion was the possibility of rate cut whereas the MPC statement was interpreted as leaning more towards hawkish. What would be your message to the market who had expected a pause along with a dovish tone?
A: At the outset, my usual disclaimer. Comments are my opinions, not of the MPC.
I don’t think it is a secret that all options and alternatives and their implications are intensively discussed at the MPC meetings. The neutral policy stance was adopted to preserve optionalities. A former RBI Governor said a central bank should never say never; same with monetary policy. My statement said, “Given this level of extant and evolving uncertainty, it is difficult to provide even a modicum of forward guidance. [My] policy decisions will continue to be based on incoming data and be taken on a meeting-by-meeting basis”.
Q: The market is in a liquidity glut and CRR will only put pressure on banks to deploy funds, at a time when supply is not being absorbed, especially at the long end. How do you respond to criticism that the MPC overdid instead of sequencing it well?
A: Management of system liquidity is beyond MPC’s purview, but this is crucial to the primary objective of transmission of policy rate decisions to multiple interest rates. However, I will say that RBI has deftly managed system liquidity, deploying various instruments to maintain the operating and other short-term rates at levels consistent with monetary policy. The pre-emptive CRR cuts will help to stabilise system liquidity in the coming months when there is expected to be multiple drains on the surplus. And the instruments to calibrate liquidity levels are still available.
Q: The announcement to reform the GST structure shows that growth is the government's priority even at the risk of potential fiscal slippage. Do you think this will have to be complemented by monetary easing? How do you balance this given that inflation on the horizon is forecast to be above 4%?
A: In principle, monetary policy is always ready to support growth, but not at the cost of price stability. The proposed GST rate slab transition changes should initially result in a fall in prices of most goods and services. However, with the higher disposable incomes likely to incentivise consumption demand, the second-round effects of output, investment and growth on the prices of at least some goods and services are difficult to predict.
The eventual effects of GST re-structuring on indirect tax collections and on the fisc needs to be kept in mind. This will impact market interest rates. In addition, the effects of transmission of repo cuts and liquidity infusion into lending rates and subsequently on credit demand also remains to be seen. A higher credit offtake will certainly complement a fiscal policy stimulus.
Q: Yields have surged and SBI has raised the upper band of home loan rate– which can be seen on the margin as a rate hike – do you think the abrupt shift to neutral stance was an error?
A: The reversion to the neutral policy stance at the June policy meeting was a deliberate decision to signal that, post a front loaded rate cut, continued policy easing was not a given; a pause was also an option. The rise in, say, the 10-year bond yield follows a pattern of bond markets’ reactions on nearing a perceived end of the policy cycle. In addition, keep in mind the earlier rally, when the yield had fallen by almost 55 bps over March to June. And the bulk of the subsequent rise was not post the June policy (when the stance was changed), but the recent one. In short, there are multiple factors behind rate moves.
I will not comment on specific institutional decisions. However, bank flexible home loan rates are now external benchmark linked and will have fallen by the same amount as the repo rate. Adjustments of the spreads might moderate the rate cut, but those are business calls.
Q: In the context of tariffs uncertainty and muted global growth, will India have to settle for lower than its aspirational growth rate? In the past, strong growth phases had a strong correlation with rising exports. Do you think the RBI will have to consider lowering rates towards the end of the calendar year, or will it be pushed further?A: Periods of uncertainty and adversity have historically been catalysts for structural reforms in India, which have been ongoing for many years. I hope the momentum for deeper structural reforms accelerates. As I mentioned at the outset, it is impossible to provide any forward guidance given the elevated uncertainty. All policy options remain on the table, with the constraints of balancing the various trade offs guiding the policy response path. The impact of the external environment on growth will certainly be a consideration.
You may also like
Rahul Dravid Names The Two Toughest Bowlers He Faced During His Career
Mikel Arteta provides Arsenal injury update on Kai Havertz and three more players before Leeds
Bengaluru's Cricket Dreams Dimmed as Women's ODI World Cup 2025 Moves Away
Mumbai Police Uncover Cyber Fraud Ring, Arrest 12 for ₹60.82 Crore Scam
Tragic Accident on Eastern Peripheral Expressway Claims Three Lives
