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MPC minutes – Focus on growth; biding time for swift policy action

* The Monetary Policy Committee (MPC)’s resolution was in line with expectations, with the policy repo rate being unchanged at 4% on 8th Dec’21. The reverse repo and Marginal Standing Facility (MSF) rates were also kept unchanged at 3.35% and 4.25%, respectively. Just like in the previous policy statements of FY22, the decision on the rates was unanimous. However, the decision to keep the stance unchanged was made based on a 5:1 majority, with Prof. Jayanth R Varma alone expressing his reservations.

* Inflation projections were kept unaltered at 5.3% YoY for FY22 (slightly below our expectation of 5.4% YoY), as was the growth forecast of 9.5% for the year (higher than our forecast of 9.1% YoY).

* The RBI proposed three measures to manage the surplus liquidity: a) to enhance the 14-day Variable Rate Reverse Repo (VRRR) auction amounts on a fortnightly basis; b) to provide an option to banks to prepay the outstanding amount of funds availed under the Targeted Long-term Repo Operations (TLTRO) 1.0 and 2.0 announced on 27th Mar’20 and 17th Apr’20, respectively; and c) to return to the normal dispensation under the MSF.

* There were no major surprises in the policy statement. We believe inflation to come in higher and real GDP lower than expected by the RBI. This, along with the possible threat from the Omicron variant, could postpone a hike in the reverse repo rate to Apr’22. On the contrary, if real GDP growth and inflation do come in line with the RBI’s expectations and the fear related to Omicron does not materialize, a 15bps reverse repo rate hike could happen in Feb’22. We also believe that the Union Budget 2022–23 would influence the MPC’s decision of Feb’22.

Fear of the Omicron variant keeping MPC members cautious

* Minutes of the MPC meeting held between 6 th Dec’21 and 8th Dec’21 revealed that members acknowledged the uncertainty on domestic growth prospects which is restricting monetary policy normalization at this point, even as risks emanate from global markets (financial market volatility, high commodity prices, etc.). Therefore, most of the members favored avoiding a “premature tightening”.

* Moreover, they also recognized the fear arising out of the Omicron variant. RBI Governor, Shaktikanta Das was of the view that continued policy support was warranted for a “durable, broad-based, and self-sustaining rebound” to make recovery more even across sectors. “In this scenario, it would be prudent to watch out for growth signals becoming well entrenched while remaining vigilant on inflation dynamics,” Governor Das said in his minutes.

* Overall, the members believe a firm understanding of the Omicron’s impact is necessary before making any policy move. Although inflation has been hovering below the 5% mark over the past four months, continuous supply-side bottlenecks along with rising input prices globally call for an “eagled-eyed” watch on inflation. While the policy statement of 8th Dec’21 showed MPC in a dovish light, the minutes revealed the dilemma members are facing amid an uncertain COVID variant and subsequent economic recovery.

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