RBI monetary policy-makers sharply disagree over rate cut

Mumbai: The minutes of the October policy meetings of the monetary policy committee (MPC) suggest that there will not be a cut in the December policy as well, unless the Q2 growth numbers surprise, said a brokerage report.

Though the economy has bottomed out in the first quarter and retail inflation may stay under 3 percent in October, since core inflation is likely to be above 4 percent, we expect the rates to remain unchanged even in the December policy, said Japanese brokerage Nomura.

"Retail inflation is likely to moderate to under 3 percent in October, but since the drop is driven by food prices, core inflation is likely to stay above 4 percent amid rising risks of a fiscal slippage, we expect rates to stay unchanged in the December 6 meeting," the brokerage said in a note.

While MPC member Ravindra Dholakia and Michael Patra of the central bank are likely to continue to vote for a cut and a pause, respectively, the response of the other four members will depend on how well growth holds up.

"The divergence in views of Dholakia and Patra remains intact with the former seeing space for a 40 bps rate cut owing to very high real rates, while the latter voting for a pause, but stated that the MPC must be ready to raise rates if needed," the report noted.

September quarter GDP print (to be out on November 30) is important as most real activity data so far suggests that at 5.6 percent the economy has bottomed out in Q1, and GVA growth should rise close to the RBI projection of 6.4 percent in the second quarter of the current fiscal year.

The Reserve Bank released the minutes of the October 4 policy meeting yesterday. The MPC voted 5-1 for status quo. Government nominee in the MPC Ravindra Dholakia was the sole dissenter voting for a 25 bps rate cut.

"The minutes suggest that most members voted for a pause as they are concerned about the sharp rise in headline and retail inflation, higher oil prices, rising fiscal risks and still-elevated inflation expectation.

"Most members also expressed concerns about slowing growth, especially weaker Q1 outturn, but decided to wait for more data to ascertain whether the dip is sustained, as GST implementation has also played a role," the report noted.

The investment slowdown was also highlighted by many members as a concern because of its impact on potential growth, but the role of monetary policy (in reviving capex) was viewed as limited, while a bigger role was seen for structural reforms and for addressing the twin balance-sheet problems of companies and banks.

But many members were optimistic about a growth recovery in coming quarters.

Noting that four MPC members were neutral, adopting a wait and watch stance on growth, and the divergent views of Dholakia and Patra remaining intact, with the former seeing space for a 40 bps rate cut owing to very high real rates, while the latter voting for a pause, the report said the MPC must be ready to raise rates if needed.

Overall, the minutes suggest that while Dholakia will continue to bat for a rate cut, Patra will continue to vote for a pause, but the other four members' decisions will depend on how well growth holds up.

Retail inflation may moderate to under 3 percent in October and may print 50 bps below the RBI projections of 4.2 percent by March. But the headwind is that the headline inflation drop has been driven by food prices.

"We assign only a 25 percent probability to a cut, provided core inflation substantially undershoots, growth disappoints or if government sticks to the fiscal deficit target," Nomura concluded.