New members give RBI's MPC dovish tilt; to hold rates on Oct 9: Analysts

The addition of three new members – Jayanth Varma, Ashima Goyal and Shashanka Bhide – to the Reserve Bank of India’s monetary policy committee (MPC) lends a dovish tilt to the central bank’s think tank on policy, say analysts, who feel it may keep rates unchanged in the policy review later this week.

On Monday, the RBI appointed Jayanth Varma, professor in Indian Institute of Management, Ahmedabad, Ashima Goyal, member of Economic Advisory Council of Prime Minister and Shashanka Bhide, senior advisor at National Council for Applied Economic Research as the three external members of the monetary policy committee.

“We believe that the new external members are more neutral-to-dovish in their policy views, which will tilt the overall MPC in a dovish direction. However, we do not expect any immediate impact on policy, given the current high levels of inflation. We expect a dovish hold this week on October 9 (unchanged policy rates and the continuation of an accommodative stance),” wrote Sonal Varma, managing director and chief India economist at Nomura in an October 6 co-authored report with Aurodeep Nandi.

In light of their prior support for unconventional monetary policy and criticism of hawkish policies that over-emphasise the importance of high inflation, Nomura believes the new MPC members are likely to be vocal on liquidity and credit market dynamics and may not shy away from advocating the RBI’s use of the unconventional or untested measures.

Rahul Bajoria, chief India economist at Barclays, too, shares this view and says that the appointments will not dramatically change the near-term monetary policy outlook.

Inflation woes

Rising inflation, according to economists, is another cause for concern. While high food inflation poses a near-term risk, the third quarter of the current fiscal (October – December 2020) should mark the peak at around 6.8 per cent.

In its last policy meeting, the RBI’s six-member monetary policy committee voted unanimously to hold interest rates. Although the statement acknowledged the room for further rate cuts, the commentary made future rate cuts contingent on a “durable reduction” in inflation.

“Given our new inflation forecast trajectory, we believe that room to cut rates further will likely open up only in Q1 2021. Hence we expect a one-off rate cut of 25bp in the February 2021 MPC meeting. In the meantime, the central bank may continue to ease financial conditions through liquidity and regulatory measures,”  said Bajoria of Barclays.

Those at Nomura expect inflation to trend lower over the next 6 – 12 months due to favourable base effects, falling towards 4.5 per cent for most of 2021.

“We expect current stagflationary conditions to ease starting in Q4, with a more permanent impact on trend growth and a more transitory inflation surge. As such, we expect 50 basis point (bp) in cumulative rate cuts, delivered in doses of 25bp each in December and February 2021, with growth remaining below trend,” Varma and Nandi of Nomura said.