SBI flags 'chalk and cheese' divide in RBI's monetary policy signals

SBI Research says the MPC minutes carried a more hawkish tone than the RBI governor's remarks, leaving markets uncertain about the future course of interest rates

The Reserve Bank of India’s (RBI’s) recent policy communications have sent conflicting signals on the future course of interest rates, according to the latest report by the State Bank of India (SBI).  

 

The report compared the minutes of the Monetary Policy Committee’s (MPC’s) August meeting, the accompanying monetary policy statement, and RBI Governor Sanjay Malhotra’s public remarks, and found the three documents diverging in tone.

 

Soumya Kanti Ghosh, group chief economic adviser at the bank, noted that the MPC minutes carried a distinctly hawkish undertone, dwelling on inflation risks and keeping the door open for further rate action.

   

“The recent monetary policy minutes, monetary policy press statement and the governor’s statement for August and even earlier months reveal the conundrum of ‘chalk and cheese’ in monetary policy. There were clear yet divergent signals from these three statements despite originating from the same institution/source,” Ghosh said while noting a “communication puzzle” emerging from the RBI’s latest policy cycle.

 

The governor’s statement, by comparison, struck a calmer, more data-dependent note, giving more weight to the growth momentum and financial-sector conditions than to inflation risk.

 

To capture this gap, the bank has built a tone index using the governor’s statement as a baseline of 1. On that scale, the MPC minutes scored 1.76 in June and 1.82 in August (a reading more than 1 signalling greater hawkishness). The widest gaps between the two showed up specifically in discussions of rates and the policy stance, and in the treatment of inflation, the report said.

 

That split, according to the report, has left markets guessing whether to price in a rate increase in October or to take the governor’s cautious tone as the guide to the regulator’s next move.

 

SBI Research said the window for an increase had technically opened but that the decision remained delicately poised, pointing to two broad sources of uncertainty.

 

The MPC kept the repo rate unchanged at 5.25 per cent for the fourth meeting in a row while maintaining the “neutral” stance.

 

On the external front, the report flagged resilient but fragile growth in the United States (US), buoyed by consumer spending and artificial intelligence-related investment, but shadowed by a surprise contraction in non-farm payrolls and a national debt, which has now crossed $40 trillion.

 

It noted that the US Treasury’s decision to at least double its bond buyback size made a near-term rate increase in the US look unlikely even as the move raised the prospects of the Fed eventually stepping in with more direct intervention.

 

The report pointed to an uneven and underwhelming monsoon in India as a bigger worry. Despite an overall shortfall of only around 13 per cent, key foodgrain-producing states such as Bihar, Andhra Pradesh, Punjab and Karnataka are running large deficits, and forecaster Skymet has since cut its seasonal outlook and raised the probability of drought conditions.

 

Against this backdrop, the report has argued that addressing rural distress, including through the newly launched rural employment-guarantee scheme, which has so far seen a sharp fall in person-days generated compared with its predecessor, should take precedence over tightening monetary policy.

 

Pursuing an expansionary push in rural spending alongside a rate increase, the report cautioned, would be difficult to reconcile.