With fall of the last dove, MPC minutes portend more than one RBI rate hike

Data puts differences to rest. That in a nutshell explains how the six members of the Reserve Bank od India’s monetary policy committee (MPC) came together to vote for an RBI repo rate hike earlier in June.

Recall that there has been at least one dissenting vote in the six meetings of the MPC preceding that of the current month.

MPC minutes from the latest RBI meeting, which lasted for three days instead of the customary two, showed that the most dovish member Ravindra Dholakia now shares the view of his antithesis Michael Patra on inflation. Indeed, it became difficult for Dholakia to ignore the sharp rise in crude oil prices and its impact on the economy. Inflation expectations too seem to have begun to worry not just Dholakia but every member of the MPC. Both these factors have been copiously referred by all of them in building a case for an RBI rate hike.

The strongest word on inflation is of course by long-standing hawk Patra. The emerging inflation trend has only added more urgency to his demand for a rate hike. Patra believes that policy tightening will not only anchor inflationary expectations but more importantly safeguard the Reserve Bank of India’s credibility. The others, namely Governor Urjit Patel, deputy governor Viral Acharya and members Chetan Ghate and Pami Dua added their voices to the argument of anchoring inflationary expectations.

The minutes also show that all members have found common ground on not just inflation but also the growth outlook. Notably, Dholakia too now believes that the output gap is closing. Recall that Dholakia and Patra had very divergent views on the output gap not more than six months ago.

The convergence among members is good but what is better is the common ground still has room for uncommon views. While Dholakia has changed his view on the output gap, he pointed out that it has not started affecting wages yet. That could have a salutary effect on inflation as wage driven inflation is yet to manifest. “In this context, it is important to recognize that while the average growth during 2018-19 is likely to be around 7.4%, in none of the quarters it is projected to exceed the 7.7% mark observed in 2017-18 Q4,” he added. Patra has asserted yet again on the pressures caused by a closing output gap.

Given that every member believes inflationary pressures from all corners of the economy are rising and growth impulses are getting stronger, the premise that the current rate hike cycle could be shallow seems tenuous. True, no member has strongly talked of a change in stance or has even indicated that a series of rate hikes could be in the offing. But the pressures on inflation, from global commodity prices to local deficits coupled with the emergence of the old bugbear of core inflation suggests that the RBI may not limit itself to just one more hike.