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MPC minutes – Core CPI inflation needs scrutiny

* As per our expectations, the Monetary Policy Committee (MPC) had kept the repo rate unchanged at 4% on 5 Feb’21. The reverse repo/Marginal Standing Facility (MSF) rates were also kept unchanged at 3.35%/4.25%. Besides rates, all members of the MPC voted unanimously to continue with its accommodative stance as long as necessary – at least during FY21 and into FY22.

* However, inflation and growth projections were revised significantly, as anticipated. The RBI now expects CPI inflation at 6.8% YoY in 3QFY21 (in line) and 5.8% YoY in 4Q (v/s our forecast of 6.1%). While it projected inflation between 4.6% and 5.2% in 1HFY22, our calculations suggest it will remain ~6%. The elevated inflation projection constraints MPC from ‘using the space available’ to act in support of (declining) growth.

* On the growth front, the MPC expects real GDP to contract much slower by 7.5% YoY in FY21 from its earlier expectation of 9.5% YoY, which is largely in line with our expectation. Moving into FY22, the forecasts turn highly volatile, with RBI projecting a growth between 6.5% and 21.9% in 1HFY22.

* Besides these, the RBI also announced a host of other regulatory measures. As far as fresh regulatory announcements were concerned, the policy had turned out to be a non-event as only liquidity measures initiated in earlier meetings would continue. While the upward revision in growth projection for FY21 reveals RBI’s confidence in a recovery in economic activity, higher inflation implies that rate cuts are unlikely in the near future.

MPC members vigilant about sticky core CPI inflation, while growth gathers momentum

* The minutes of the MPC meeting held between 3 Feb’21 and 5 Feb’21 reveals that members were reassured about the recent fall in inflation to 4.1% in Jan’21 v/s 4.6% in Dec’20 (data available at the time of the meeting). However, two risks – sticky core inflation and high global commodity and crude oil prices – were consistently discussed by all members.

* According to the Dr. Michael Patra, “Core inflation remains stubborn and will warrant close monitoring as it has the potential to render the recent fortuitous improvements in the macroeconomic outlook stillborn.”

* Members continue to believe that concrete support for consumer demand will be needed for a meaningful recovery in employment and income growth. The also saw the need for government spending to support investment and consumption at this juncture.

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