RBI MPC minutes: Is reverse repo hike imminent? Ashima Goyal decodes monetary policy stance

Inflation numbers unlikely to inch lower, says SBI’s Soumya Kanti Ghosh

Ashima Goyal, a member of the monetary policy committee, spoke to CNBC-TV18’s Latha Venkatesh to discuss her point of view.

From the time the new committee came in FY21, the inflation rate has been above 6 percent - for the past year 6.2 percent, this year, it is expected to average 5.7 percent, according to the Reserve Bank forecasts; and even next year, in the first quarter, it is expected to be nearly 5 percent. When asked if she was worried that there was a permanent element of inflation?

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Goyal said, "We need to remember that we are in exceptional times - this is a pandemic year since the new MPC came in. So, given that, given Indian’s in inflation history, I think if the US inflation has gone about their band, ours has at least stayed in the band, also it fell below. MPC has three quarters within which they have to make sure inflation is in the band and they have never violated that this past year, because inflation came down in April."

Inflation came down to 4.3 percent in April, then it went up in May and June and this coincides with the third wave spikes. "So, again, exceptional times with partial lockdowns, which increased supply…. international commodity prices were....."

"So given this, I don't think one can decide that inflation is persistent because even household inflation expectations are they are rising, but they fail after the first wave abated. And, they might fall again, wait to see the next data," she said.

According to her, some experts still think a third wave can come and then at that time no one can afford to worry about inflation because that would impact livelihoods and growth.

"So we have to wait and see. I think in another two months we'll have clarity. At present it looks like that vaccination is proceeding and the COVID infection rates are coming down constantly. But, I think we need to watch a couple of months before we decide that inflation is persistent, and B that we don't need to worry about COVD."

When asked, the other fear was that it was creating asset inflation - very loose monetary policy and very large amounts of liquidity was that a worry, Goyal said much of this liquidity is created abroad and because India has good long-term growth potential now compared to most countries in the world, it is seeing inflows all the time and that is the major source of liquidity.

"We can't compensate for international QE, we cannot go in the opposite direction and hurt our growth because internationally, the US is stimulating its growth. That would be absurd, she explained."

The MPC only voted on the repo and if she were asked to vote on the reverse repo, would she agree with the argument that one was too low, Goyal said, “Not at present because it's 1.5 percent and even if you say future inflation one year ahead is five percent then 3.35 percent, its minus 1.5 percent, looking at the T Bills, one year T Bills rate, so I think that much of a negative real interest rate is alright for a pandemic situation where you're where you're not seeing any signs of excess demand."

According to the minutes, Goyal stated that she was with normalisation even when the stance is accommodative. When asked what she meant by that? Did it mean a reverse repo hike or does it mean reducing the amounts of liquidity through larger variable rate reverse repo?

She clarified, “I am not saying I am okay with normalisation, I'm saying that the way stance has been defined. It only affects repo changes. So, if exceptional measures were taken on liquidity and changing the reverse repo, during the pandemic, these can be reversed and that was during an accommodative stance and these can be reversed in the same stance. Because the second thing is that the RBI Act, the way inflation targeting has been added to it and passed in Parliament, says that liquidity management is the RBI’s concern."

"So excess liquidity and decisions on the reverse repo, the MPC does not vote on it. And actually liquidities very day-to-day event -- you're always intervening in markets, you're taking decisions, and MPC cannot be involved in all that."

And in normal times, this band is fixed between the report and the reverse repo, so when RBI changes the repo, the reverse repo automatically changes. In these exceptional times, the gap between the two has been right.

For the entire discussion, watch the accompanying video