Understanding The Men And Women Of India’s Monetary Policy Committee
Election years can be treacherous for India’s economic policy makers. While these policymakers may eventually stand their ground on decisions that must be made, the ambient noise is louder when elections are around the corner.
In that context, a recent casual conversation brought up a question – inflation is rising but can interest rates be raised much in an election year? The quick and confident response to that was, of course!
The chances of that confidence being misplaced are much lower today than a few years ago. After all, the probability of swaying a diverse six-member Monetary Policy Committee is much lower than the probability of swaying one single decision-maker. In fact, that was one argument made in favour of an MPC by former RBI Governor Raghuram Rajan.
Now that the MPC is firmly in place we can be reasonably sure that any decision, right or wrong, will be made based on the beliefs of individual members. Over the last 11 meetings of the MPC, those beliefs have started to become clearer to monetary policy watchers. Through the minutes, the personalities of the country’s monetary policy makers have begun to emerge.
Urjit Patel: The Strong, Silent Type
That RBI Governor Urjit Patel is a man of few words is now well accepted. Patel’s MPC statements reflect that. What he says in the MPC’s minutes is very close to what was written in the monetary policy resolution.
Perhaps this is because the governor holds a casting vote and his view, at some point, could prove to be the deciding factor.
Patel gives away little on the indicators that he sees as most important or the factors that he feels outweigh others. At most, his statement holds a few extra words of emphasis.
Take, for instance, the minutes of the June MPC meet.
Patel details the upside risks to inflation highlighted in the committee’s resolution. He goes on to cite growth indicators, also part of the MPC’s joint statement. Finally, he shares his vote and says that it is “apposite” to maintain a neutral policy stance “to respond to the evolving situation in a flexible manner.”
Analysts held on to that last statement and used that as one clue that Patel may consider one or two more rate hikes as adequate for this cycle.
Viral Acharya: The Debater
Deputy Governor Viral Acharya is quite the opposite.
Often, it seems like he is debating the issues out in open before explaining his final decision. Recently, he has even given guidance on his future course of action.
In the April meeting, Acharya put out an extensive statement on his reading of the evolving inflation scenario. He made a distinction between the ‘signal’ and the ‘noise’ embedded in the inflation data.
Acharya explained that persistently rising core inflation may be the signal and the volatility in food prices may be the noise.
He went on the say that he is likely to vote for a ‘withdrawal of accommodation’ in the June. Acharya, like others in the committee, voted for a rate hike in June. He explained the hike as a way “to signal concern about underlying inflation, manage inflation expectations, and guard proactively against a further increase in inflation.”
That, together, with his view that a neutral stance would allow the MPC to respond in a flexible manner, led analysts to believe that he too forsees a shallow rate cycle.
Michael Patra: The Quintessential Hawk
RBI Executive Director Michael Patra, a central bank lifer, has been termed as the resident hawk of the monetary policy committee. The analyst fraternity is familiar with him and the indicators he tracks. That’s not to say that the markets always agree with him. To the contrary, in fact.
Patra’s statements carry candour and conviction. He started arguing for higher rates as early as last December. In February, he voted for higher rates and cautioned that a series of rate hikes may be needed. In April, Patra said that growth impulses are strengthening. Absent policy action, the MPC would not be in a position to meet the mid-point of its 4 (+/-2) percent inflation target even in 2018-19, Patra cautioned.
In June, he impressed upon the committee that it must act unanimously and send out a strong message that the MPC is committed to meeting the mid-point of its inflation target. Most analysts believe that Patra will vote for another rate hike in August.
Ravindra Dholakia: The Principled Professor
The three external members of the MPC come from an academic background but Ravindra Dholakia comes across as the archetypal professor.
His views are as strong as Patra’s but sometimes diametrically opposite. Oh, to be a fly on the wall when Patra and Dholakia are debating monetary policy!
Dholakia had been arguing for rate cuts last year. That prompted many to call him a dove. Dholakia, however, proved that analysis wrong and showed that he is driven by certain data points that he believes in. Among them is the Business Inflation Expectation Survey, conducted by the Indian Institute of Management - Ahmedabad. The survey covers 2,500 respondents and complements the household inflation expectations survey conducted by the RBI.
Many expected a split MPC in June, with Dholakia expected to continue voting for a status quo. The committee, however, surprised with a unanimous vote.
Among them were both the RBI’s household inflation expectation survey and the IIM Ahmedabad business inflation expectations survey.
Dholakia, like Patel and Acharya, felt that a neutral stance was warranted, leaving analysts guessing on his preference for future action.
Pami Dua: The Data Watcher
Pami Dua’s mind is tough to read. Her statements follow the message in the data.
She typically cites the data releases of the government and the RBI, along with the indicators crafted by the Economic Cycle Research Institute. That’s not surprising given that Dua teaches econometrics, time series analysis, forecasting and macroeconomics at the Delhi School of Economics.
Her comments are to-the-point and data driven. But its tough to gauge her broader views on the outlook for the economy. Her vote to hike rates in June was driven by “hardening of actual inflation, rising inflation expectations along with prevailing upside risks to inflation.”
Given that some of those inflation risks have magnified further since June, Dua could very well vote for another rate hike in August.
But her preference for a neutral stance could equally mean that she favours spacing out the rate hikes.
Chetan Ghate: The Thinker
Chetan Ghate came to the MPC with a long list of accolades under his belt. He was the winner of the 2014 Mahalanobis gold medal in economics and had a number of prestigious degrees and teaching assignments to his name. He was also a member of the committee headed by Patel, which had recommended the new monetary policy framework.
Ghate’s MPC statements have offered analysis beyond the data.
For instance, in February, when the MPC met soon after the union budget, Ghate flagged off his research which had shown how an increase in the minimum support price can lead to generalised inflation. That debate will make a comeback in August, with the details of the MSP hikes now in public domain.
In April, Ghate spoke of the possibility of the “twin terms of trade shocks”. Could higher MSP and rising oil prices complicate the growth-inflation trade-off, he asked.
In June, as he finally voted for a rate hike, Ghate went back to the thinking of the monetary policy review committee of 2014 and added another variable into the rate decision: The need to ensure that the inflation target (4 percent) and the inflation forecast start to look identical on a durable basis.
With that target still some distance away, Ghate could well see the need for another rate hike soon.
Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.
