While the new members will be domain experts, it would be too early for them to take a proper grasp of the situation once they get to see the microscopic picture of the real economic situation in hand, which would be much granular than what is put out for the public.
“The induction of new MPC members is unlikely to impact any decision making at RBI as we believe MPC as a group with decisive inputs from RBI is more empowered to take decisions technically and in a cogent manner. Additionally, in 2016 when new MPC members were inducted, the decisions were always unanimous in the first few meetings indicating ultimately the regulator matters,” observed Soumyakanti Ghosh, group chief economic advisor at State Bank of India group. Ghosh doesn’t expect any cut in the rest of the financial year either.
In fact, it is the MPD of the RBI that works behind the scene for MPC as well.
“RBI's Monetary Policy
Department assists MPC in formulating the policy. Given the framework and support of MPD, a late induction is unlikely to have an impact," said Sameer Narang, chief economist of Bank of Baroda, given that inflation is well above RBI’s target of 4 per cent and the tolerance upper end of 6 per cent.
Similar sentiment is echoed by bond market participants as well.
“The decision during this MPC meeting might be more driven by the RBI governor's thinking as the other three members will be very new. So, we expect a hold on policy rates, but continuation of a dovish stance with focus on growth and downplaying of inflation concerns,” said Prasanna Balachander, group executive and head of global markets at ICICI Bank.
“Whoever is appointed in the MPC will be those who keep eye on the economy on a regular basis. At the end of the day, it is the decision of six wise persons. It is unlikely that the late appointment of the members will have a significant impact on the outcome of the monetary policy,” said Devendra Pant, chief economist of India Ratings.
There should be a pause, and the late induction of members “won't affect decisions which are linked to inflation which is high," said Madan Sabnavis, chief economist of Care Ratings. “But new members would have different ways of looking at things and hence commentary will probably change," Sabnavis said.
The policy repo rate now stands at 4 per cent, while the reverse repo rate is at 3.35 per cent. The central bank has eased the policy rate by 250 basis points since February 2019, including lowering it by 115 basis points since March 27 after the country went on a lockdown due to the pandemic.
Late induction of members notwithstanding, the RBI has good reasons to wait out for further rate cuts. Increasingly, the room to lower rates is getting squeezed. While the rate transmission has happened in the lower end of the yield curve, longer dated bonds have not yet passed on the full rate cuts. And with oversupply concerns taking hold of market sentiments, RBI is struggling to keep the 10-year bond yields at 6 per cent mark. Inflation is above the tolerance band of the RBI, and the August print for consumer price index (CPI) inflation came at 6.69 per cent. RBI is mandated to keep the inflation contained between two and six per cent.
“Considering that inflation is running well above the higher end of the target band, the majority of the MPC should be inclined to keep rates unchanged based on their mandate. As such significant monetary easing has already been provided, the key issue now is transmission of past cuts and surplus liquidity conditions, to even the longer-end of the sovereign curve along with other market rates," said Gaurav Kapur, chief economist of IndusInd Bank.
Late induction of external members is unlikely to materially change the collective thinking on the need for further policy easing immediately, while the country awaits a fiscal stimulus, Kapur said.
Saugata Bhattacharya, chief economist of Axis Bank expects a pause, while there could be lots of assurance on “accommodation” going forward. Aditi Nayar, principal economist of ICRA
also doesn’t see a cut in the upcoming policy.
Upasna Bhardwaj, senior economist at Kotak Mahindra Bank also expects a pause in policy rates, “irrespective of the timing of induction” of the new policy members.
Harihar Krishnamurthy, head of treasury of FirstRand Bank said any new MPC members will have to face the high inflation prints, and therefore, the decision should be to pause, especially as in the last monetary policy, the RBI had said rate actions would be taken when the economic numbers turn favourable.
The next rate cut, in all likelihood could be announced only after taking into consideration Budget numbers in February.
“By that time more clarity will emerge, say on deficit financing, base effect pulling the inflation down, besides a call can be taken based on the credibility of the budget numbers too,” Pant of India Ratings said.