In Shaktikanta Das’ Monetary Policy Committee, There Is No Room For Dissent

The Monetary Policy Committee of the RBI has started its first meeting for the current fiscal year, to discuss the interest rates in the country. The question on everybody’s mind is: will it go for a rate hike this time or not?

Given the spike in inflation in the consumer price as well as wholesale price indices, most economists would be of the view that the central bank needs to control excess liquidity in the market before consumption, whatever little is left at the bottom of the pyramid in the Indian economy, is destroyed. However, RBI governor Shaktikanta Das thinks differently, which means the MPC that he helms also thinks differently. 

Since his appointment in December 2018, Das’ only role in the country’s monetary policy has been to either bring the interest rates down or maintain the status quo with an accommodative stance. The minutes of the MPC meetings chaired by Das since then reveal that in his committee, all the six members have always been in agreement about the policy decisions being taken. 

Under Section 45ZB of the amendment to the RBI Act, 1934, the six-member MPC, constituted by the central government, has to be a diverse set with 50 per cent of the members being nominated by the government in addition to the three ex officio members—the governor, deputy governor and one officer of the bank nominated by the central board of the RBI. While the government appointees, recommended by a search-cum-selection committee, can represent the government's view, they must be “persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy”.

Interestingly, in the 19 MPC meetings that Das has chaired so far, there have been only two instances of dissent on the issue of policy rates’ decisions. One of the dissenters was Viral Acharya, the former deputy governor of the RBI who later quit over his differences with the government as well as Das on the issue of interest rates. The second one was Dr Chetan Ghate who was also part of the MPC headed by Das’ predecessor, Urjit Patel, who had himself resigned over differences with the government on the issue of the RBI’s transfer of surplus money to the Centre. 

 Das’ Flirtation With Inflationary Fire

In its last MPC meeting, held in February this year, the RBI had said that it expected the consumer price inflation to be just 4.5 per cent for the entire fiscal year of 2022-23. In the same month, India’s retail inflation had spiked to 6.07 per cent which was in line with high inflation being witnessed across even the developed economies. Das and his MPC, however, have continued to maintain that inflation in India is different from what is being reported in other countries.

Against the backdrop of the global supply chains being in complete shambles with most industries struggling to even source raw material to meet their demand, most economists, outside the government, disagree with the RBI’s dovish projection. “We expect these benign inflation projections to be revised higher at subsequent meetings as input price pressures are yet to be passed on to the economy,” Standard Chartered Plc economists had written in a note following the MPC meeting. “Unless commodity prices correct significantly from here, achieving the FY23 inflation target of 4.5% will be challenging,” they added.

With the ongoing Russia-Ukraine war running longer than anticipated, inflation is set to climb higher in the remaining part of the year, especially because of the fluctuating price of crude oil and its impact on the price of every other commodity.

What Is At Stake?

Even as Das’ amiable MPC mulls over the complex task of balancing growth with inflationary pressures, it is worth noting that countries across the world are fearing stagflation—a period of high inflation and unemployment rate and low growth. Keeping this in mind, central banks across the world are now steering clear of the easy monetary policy that they had deployed earlier to deal with the pandemic that had killed demand in the global economy.

Last month, the US Federal Reserve announced its first rate hike since the pandemic with an indication of six more coming up in the remaining part of the year. In India, the lack of private sector capital expenditure over the last decade has forced the government to keep its expenditure high through borrowings from the market. While a low-inflation regime, like the one being pursued currently, allows the government to keep its interest outgo low, it can also kill demand in the segment of population that does not depend on loans for its livelihood and survival.

Government data shows that the private final consumption expenditure—a proxy for household expenditure—was at Rs 80.81 lakh crore in 2021-22, down from Rs 83.22 lakh crore in 2019-20. Even though India is estimated to grow at above 9 per cent in FY23, the lack of consumption in Indian households is an indicator of a disease that needs immediate attention. If the ultimate aim of the RBI is to support growth in the Indian economy, it must note that liquidity in the hands of a few through lower interest rates can help keep the stock markets up for years. Having said that, it may not be possible for India to grow rapidly in the coming years without addressing the affordability of basic consumption for regular Indian households. Hope members of Das’ MPC show some dissent this time.