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The minutes of the Monetary Policy Committee (MPC) meeting reveal that members acknowledged the possibility of interest rate cuts during the August gathering. However, concerns regarding the ongoing transmission of previous rate reductions, uncertainties arising from US trade tariffs, and anxieties about potential fluctuations in food inflation led the members to collectively decide to maintain the current policy stance. Following the release of the MPC minutes, ET conducted an interview with Saugata Bhattacharya, an external member of the MPC. Bhattacharya emphasized that his comments reflect his personal opinions and not necessarily those of the MPC as a whole. He clarified that the MPC meetings involve intensive discussions of all available options and their potential implications. The adoption of a neutral policy stance was a strategic decision to preserve flexibility and optionality. Referencing a statement made by a former RBI Governor, Bhattacharya stated that a central bank should never completely rule out any possibility, a principle that also applies to monetary policy. He acknowledged the difficulties in providing forward guidance due to the existing and evolving uncertainties, stating that policy decisions would continue to be based on incoming data and made on a meeting-by-meeting basis. Bhattacharya also highlighted the importance of effective liquidity management, which falls outside the direct purview of the MPC, but is crucial for ensuring the transmission of policy rate decisions to various interest rates throughout the financial system. He commended the RBI for its adept management of system liquidity, utilizing a range of instruments to maintain operating and short-term rates at levels consistent with the overall monetary policy objectives. The pre-emptive cuts to the Cash Reserve Ratio (CRR) are expected to help stabilize system liquidity in the coming months, particularly when multiple factors are likely to exert downward pressure on the surplus. Bhattacharya affirmed that the RBI retains access to a variety of instruments that can be used to calibrate liquidity levels as needed. He also addressed the role of monetary policy in supporting economic growth, emphasizing that this support should not come at the expense of price stability. The proposed changes to the Goods and Services Tax (GST) rate slab structure are expected to initially lead to a decrease in the prices of most goods and services. However, Bhattacharya cautioned that the potential second-round effects of these changes on output, investment, and overall economic growth, particularly on the prices of certain goods and services, are difficult to predict with certainty. He also underscored the importance of carefully monitoring the eventual effects of the GST restructuring on indirect tax collections and the overall fiscal situation. These effects could potentially impact market interest rates. Furthermore, it remains to be seen how effectively the transmission of repo rate cuts and liquidity infusions will translate into lower lending rates and, subsequently, increased credit demand. A rise in credit offtake would certainly complement any fiscal policy stimulus measures implemented by the government.
Bhattacharya discussed the shift to a neutral policy stance at the June policy meeting, explaining that it was a deliberate decision to signal that further policy easing was not a foregone conclusion after a front-loaded rate cut. He emphasized that a pause in rate cuts was also a viable option. He addressed the recent increase in the 10-year bond yield, noting that it follows a historical pattern of bond market reactions when the market perceives the end of a policy cycle approaching. He also reminded observers of the significant rally that occurred earlier, during which the yield had fallen by nearly 55 basis points between March and June. He pointed out that the majority of the subsequent rise in the yield did not occur immediately after the June policy meeting when the stance was changed, but rather more recently. Bhattacharya concluded that numerous factors contribute to movements in interest rates. He declined to comment on specific institutional decisions but noted that bank flexible home loan rates are now linked to external benchmarks, meaning they should have fallen by the same amount as the repo rate. He acknowledged that adjustments to spreads might moderate the extent of the rate cut experienced by borrowers but emphasized that these adjustments are business decisions made by the individual banks. Bhattacharya expressed his hope that the momentum for structural reforms in India, which has been ongoing for many years, would accelerate. He noted that periods of uncertainty and adversity have historically served as catalysts for such reforms. He reiterated the difficulty of providing any forward guidance given the current elevated levels of uncertainty. He affirmed that all policy options remain on the table, with the need to carefully balance various trade-offs guiding the path of policy response. He emphasized that the impact of the external environment on economic growth will undoubtedly be a key consideration in future policy decisions.
In conclusion, Saugata Bhattacharya's remarks highlight the complex considerations facing the MPC as it navigates the current economic landscape. The MPC is carefully weighing the potential benefits of further monetary easing against the risks of inflation and financial instability. The impact of the GST restructuring, the effectiveness of monetary policy transmission, and the uncertainties surrounding the global economy all contribute to the challenges of formulating appropriate policy responses. Bhattacharya’s emphasis on the importance of data-driven decision-making and the need to maintain flexibility underscores the MPC's commitment to navigating these challenges in a prudent and responsible manner. His comments provide valuable insights into the thinking behind the MPC's recent decisions and offer a glimpse into the factors that will shape its future policy choices. The discussion around GST is important because the effect of the restructuring 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. Periods of uncertainty and adversity have historically been catalysts for structural reforms in India, which have been ongoing for many years. The need for balancing various trade-offs guiding the policy response path is paramount. Finally, the impact of the external environment on growth will certainly be a consideration.
Source: Must keep in mind GST revamp impact on tax collection, fisc: MPC member Bhattacharya