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? The minutes of the February MPC meeting reflected further widening divergence among MPC members on the future rates trajectory. Both the doves (Prof. Goyal and Prof. Varma) maintained caution against getting over-restrictive on rates amid an uncertain growth environment and argued that monetary policy lags should be kept in mind. While the persistent inflation narrative saw coherence among some members, a few diverged on the policy reaction to the same.

? The internal members asserted that inflation is broadening, with core getting stickier, while the secondround effect of unanchored inflation expectations would imply a higher output sacrifice ratio later. In contrast, Prof. Goyal believed India has limited evidence of demand-led inflation, while supply components of core inflation are easing. Both Prof. Varma and Prof. Goyal fear that output sacrifice ratios would be higher and (global/domestic) policymakers will need to focus back on growth.

? The world order has again evolved dramatically between the last MPC policy and minutes, with higher global (and Indian) inflation prints and Fed terminal rate repricing posing risk to EM reaction functions. We are closely watching consistent global policy repricing, the pace of global inflation evolution, and the case for impending recession – all of which will shape DM central bank policies, which could have implications for India. Back home, the inflation outlook is fraught with uncertainty. We see Q4FY23 inflation overshooting the RBI's revised forecast by ~50bps (assuming no past data revisions), although we retain our FY24 forecast at 5.2% at present. April will likely see another 25bps hike and the RBI would continue to be non-committal on future rates path, as the fluid global situation demands frequent macro re-assessments. But, we reckon the situation is fluid and might require frequent adjustments in policy assessments ahead.

MPC split gets more acute 

The minutes of the February MPC meeting, which saw a slower hike of 25bps with a 4-2 split on vote and stance (Prof. Varma and Prof. Goyal voted for a pause) depicted a cautious and data-dependent tone, with most members anchoring their arguments to the risk of sustained high inflation and their second-round effects. The divergence in views became even more acute this time. The internal members of the RBI MPC were significantly hawkish, while Dr. Bhide seemed cautiously neutral. Prof. Varma and Prof. Goyal sounded dovish, arguing that there is a likely case of excessive frontloading of hikes, overshooting what is needed to achieve price stability, and further tightening is not desirable as one has to account for policy transmission lags.

Inflation concerns see varying views

The extent of inflation concerns seemed to be varied, with the internal members arguing that the stance of monetary policy will need to remain disinflationary till inflation is returned to the target. Prof. Goyal asserted that there are still few signs of wage or demand-led second-round effects on inflation, which could lead to core inflation moderating next year – also led by past policy transmissions as interest elasticity of output/demand is high. However, the internal members refuted this. While Prof. Goyal argued inflation could surprise on the downside on a $95/bbl crude assumption, risking a procyclical stance, Dr. Ranjan debated that this assumption helps to avoid best-case scenarios, given the volatile nature of crude prices. Both Dr. Ranjan and Dr. Patra argued the recent correction owes to seasonality of vegetables, while inflation pressures otherwise have broadened. Prof. Goyal asserted that fiscal supply response (excise cuts and OMC fuel price cut) is needed amid easing commodities cycle, while others re-emphasized the near-term stickiness of core inflation. Dr. Ranjan said inflation easing has been intermittent so far, while Dr. Patra and Gov. Das felt the uncertain global inflation outlook due to ongoing geopolitical tensions, global financial/commodity market volatility, and implied decisive and durable inflation moderation seem to be missing

Growth-inflation trade-offs have different takers

Prof. Goyal argued that growth prospects still face uncertainty and a real repo rate of around 1% suits the current stage of the cycle, balancing conflicting requirements of inflation and growth, savers and borrowers well. She stated an overshooting can have persistent harmful effects, triggering a shift to a lower trend of private investment and growth, like in 2010s. Prof. Varma also feared that the monetary policy is becoming complacent about growth. Dr. Patra argued high inflation is instead weakening domestic consumption, investment as well as confidence and, thus, restoration of price stability will in fact provide a solid foundation for a growth trajectory, a view reckoned by Gov. Das as well.

Inflation surprises to keep the RBI on its toes

The 4-2 vote split may continue ahead. The world order has again evolved dramatically between the last MPC policy and minutes, with higher global (and Indian) inflation prints and Fed terminal rate repricing posing risk to EM reaction functions. We see Q4FY23 inflation overshooting the RBI's revised forecast by ~50bps (assuming no past data revisions), although we retain our FY24 forecast at 5.2% at present. Higher-than-expected headline inflation and stickiness of core will be a sore point for the RBI and could lead to further tightening by 25bps in April. However, the RBI would continue to be non-committal on future rates path, as the fluid global situation demands frequent macro reassessments. The extent of global disruption and disinflation will also remain key to the RBI's reaction function ahead.

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