RBI MPC Meeting Minutes – June 2017

Last week, the Reserve Bank of India (RBI) released the Minutes of its Monetary Policy Committee (MPC) Meeting held earlier in June. It made both for interesting and for sad reading. It was interesting because, for the first time, there was one dissent in the meeting. Prof. Ravindra Dholakia dissented. He presented a case for a rate cut for 50 basis points, rather eloquently and cogently. Cannot say the same of others.

Dr. Pami Dua, one has noticed, rather diligently tracks the Economic Cycle Research Institute in the US. One doubts if the U.S. Federal Reserve does that. ECRI’s recession warnings in this cycle have not materialised. In any case, to what extent they matter to India is unclear to me.

The excessive concern of many MPC members with farm loan waivers was disappointing. First, they are being spread over a few years.  Second, they are addressing a distress condition and that is not the same as as unprovoked fiscal give-aways. The latter is fiscal expansion. The former is merely about preventing the economy from sliding further into a slowdown and disinflation. Third and more importantly, as long as the States do not exceed their overall budget deficit, loan waivers cannot be incrementally fiscally expansionary. Dr. Ravindra Dholakia had done well to point that out. There are other reasons to object to loan waivers. But, an inflation risk is not one of them. Not this time. The farm loan waiver that UPA 1 government did in December 2007 deserves to be blamed for that and much more.

He also brought out an important point that if the unexpectedly low inflation rate seen in April was enough for RBI to revise its inflation forecast lower, then it should be good enough to cut rates too. One cannot have it both ways.

Also, it is a truism that one can always wait for more data. But, that is not going to solve the problem. In theory, with every passing month, one has more data. There is a trade-off between waiting for certainty and acting. Certainty will always be elusive in macro economics with uncertain lags. Judgement is inevitable. In the previous three months, actual inflation had undershot the central bank’s expectation.

So, a central bank that moved to a neutral stance in February has had enough time to observe the underlying behaviour of inflation and respond by June. It chose to wait again. That is somewhat inexplicable.

The following observation of the Deputy Governor, Viral Acharya was puzzling:

Accommodation in monetary policy during 2015-16 did not get transmitted to the corporate sector, and private investment remained weak then in spite of the monetary stance. The Treasury gains accruing to banks in this time, while not a direct concern for the monetary policy, only masked the true stress of their balance-sheets.

If the rate cut did not get transmitted in the form of loans but enabled bank balance sheets to get better, that is also a legitimate and justifiable reason for an easing of monetary policy. Banks, under pressure to make more provisions out of profits, were reluctant to do so because it would cause their net profits to decline and make the management look bad. But, if they found some extra gains from their bond holdings, wouldn’t that not make them more willing to recognise bad loans?

I wonder if the Deputy Governor has gotten his logic inside out or may be, I do not know something that he does. That is always possible.

In fact, a good friend pointed out a puzzling comment that the Deputy Governor had made in the February MPC Meeting. As per the Minutes,

The balanced budget, by focusing on fiscal stability and expenditure reorientation to rural and housing, seemed to exonerate the Committee from the burden of skewing rates to bridge the output gap and instead allowed the Committee to focus squarely on the inflation-targeting mandate. [Link]

Probably, he meant to say, ‘expansionary budget’. In that case, it does take the load off RBI of trying to orient monetary policy towards stimulating economic activity. A balanced budget does the opposite and, in fact, requires the central bank to offset fiscal prudence by loosening monetary policy.

In any case, for me, the budget for 2017-18 was pedestrian. Neither prudent nor expansionary nor balanced. It was a nothing budget.

Finally, it is somewhat worrying that the MPC did not discuss the uncertainty caused by government policies – for good or bad reasons. Their note-ban exercise, tax claims and pursuits, real estate regulation bill, benami bill, forthcoming Goods and Services Tax have induced uncertainty over and above the impact of stressed balance sheets.

RBI released the 77th round of Quarterly Industrial Outlook Survey on April 6th. Perhaps, the questionnaire was sent out in February or March. It should have included specific questions about higher or lower uncertainty arising out of note-ban and GST. It did not. I think they missed an opportunity.

I am also struck by the fact that it did not occur to any of the MPC members, if one went by the Minutes of the meeting.

In sum, on reading the Minutes of the June MPC meeting, one get the impression that, barring Dr. Dholakia, others seem to be in need of urgent acquaintance with the art of decision-making under uncertainty.

STCMA – 20th June 2017

Consistent with this blog’s tagline, Niall Ferguson raises an important question but does not provide an answer – he cannot – on whether political polarisation can induce more violence in America.

Public protests force HK Government to drop the arrest of a 75-year old woman who was hawking cardboard boxes without a hawker’s license.

Australian housing mess is about a decade later (or longer) than that of US housing. But, it is big or bigger? Two important articles from Bloomberg with useful charts. Here is the press release from Moody’s downgrading Australian banks. Key sentence:

The household sector’s resilience to weaker employment levels and/or rising interest rates has materially reduced.

MINT has some good charts on India’s declining computer services exports. Of course, that is not the same as IT Enabled Services.

A ‘European Central Bank’ working paper gives the ‘thumbs up’ to its Asset Purchase Programme. While one thought sclerosis was a European problem, in recent months, it has given way to hubris.

In an article purportedly about the effect of demonetisation on inequality, the author makes the breathtaking claim that unconventional monetary policies of advanced nations have reduced inequality. He cites no evidence. He cannot, because there isn’t any. Bank of England discussion paper, Andrew Haldane’s speeches, John Kay’s articles argue the opposite case and present evidence.

Sundeep Khanna offers a bizarre logic to resume cricket matches in Pakistan:

Terrorism looks constantly for the next soft target and if we keep on declaring every new target as out of bounds for normal life, very soon, we will be left with only the playing fields of Siberia. [Link]

Did ICC stop awarding cricket matches for Pakistan to host because it was a target of terrorism or because it was a hotbed of terrorism? In any case, what connection does it have with Pakistan’s victory in the Champion’s Trophy? Read my take on the Pakistan’s victory here.

Former HSBC Economist Stephen King has a new book out called, ‘Grave new world’. Interesting title. His conversation with BBC’s ‘Hard Talk’ is here. This book title has been used, it seems, before. I do not know if anyone would sue him for the title.

A response to Kashkari’s dissent at FOMC

The Federal Reserve Open Market Committee (FOMC) increased the Federal Funds rate by 25 basis points in June and still kept room for gradual increases. It made light of the fact that the inflation rate has been rather slow to rise. Nor have wages picked up. That is an amazing battle between the factors of production in which a central bank takes sides!

When wages rise, central banks tighten. Wages are costs and they feed through to prices. Therefore, it must be stopped. But, when asset prices rise, capitalists benefits and no rate increases! Why interfere? Of course, there is all about enterprise risk whereas labour can relocate if the enterprise fails. But, perhaps, it made sense in a world of unlimited partnerships and sole proprietors. In a world of limited liability, should labour and capital be treated differently, especially by a central bank?

In any case, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis dissented against the rate increase and explained his stance in a lengthy post in Medium.com. My friend Praveen sent it to me.

We had some email exchanges. The emails I sent him formed the basis of my response to Neel Kashkari’s dissent. I have explained why I think he was wrong to dissent. You can read it here.

Raghuram Rajan has the last laugh

On Tuesday, in my regular weekly column, I had written that the GDP data for 2016-17 released on May 31 was a wake-up call for the Indian government and for the Reserve Bank of India. The decline in the ratio of of Gross Fixed Capital Formation to GDP to around 25.5% in the fourth quarter of 2016-17 in nominal terms was a shocker to me. This is not the stuff of a big-league economy.

What has gone wrong? There are several culprits and each one must do what they can do instead of arguing that someone else must act first and only then will their actions be meaningful. We do not know in economics with such precision. We act and hope for the best. That is the best that can be said about economic policymaking.

(1) The government: It has consistently underestimated the growth challenge in the Indian economy. It has swallowed its own propaganda of the ‘world’s fastest growing large economy’. It failed to understand and grasp the structural impediments that the economy was trapped under. It agreed to a pro-cyclical massive fiscal tightening in 2014-15 when it took office. The real fiscal deficit it inherited was close to 6.0% and it agreed for a target of 4.1% in 2014-15. That was in the backdrop of a failed monsoon. The collapse in the oil economy prevented its folly from becoming a big blunder.

Subsequently, it had also dilly-dallied on dealing with the non-performing loan (NPA) problem in the banking sector. Majority of the loans are held by banks in which it is the dominant shareholder. The top managements in these banks are its nominees. Its nominees sit on the Board of Directors.

Nothing prevented the government from calling an all-Party Meeting or two and then also knocking heads together with vigilance agencies to allow price discovery of these loans and their resolution from moving forward. Yes, all this takes time. But, I leave it to you to decide for yourself if 36 months was enough time or not.

Third, it has pursued a policy of targeting tax dodgers and other wrongdoers in the business community. Nothing wrong here. I am not even going into the question of whether the government had been selective or unbiased in these pursuits. It has done well to do this for it is never the case of this blogger that India’s private sector is an epitome of business ethics and virtues. Far from it.  India’s economy or capitalism always was in peril and is in peril from India’s capitalists with very few honourable exceptions. So, the pursuit was fine.

But, the government should have realised that it would have an impact on sentiment and on investment by businesses. It must have had a Plan B already. Large-scale privatisations (some trophy but chronic loss-making entities like AIR INDIA) either through strategic sale or though Further Placement Offering in capital markets (FPO) should have been contemplated to shore up sentiment and to create a mood of policy dynamism and progressive thinking, etc., especially in the context of what it did on 8th November 2016. It has done nothing of that sort.

The short-term contractionary impact of ‘note-ban’ decision exercise was not taken into consideration in the preparation of offsetting measures in the budget for 2017-18. The budget was a pedestrian document and it lacked imagination. Post-note-ban, the country needed an offsetting positive excitement. The budget ensured that it did not happen.

So, the government does have a large share of the blame for the current growth malaise in India.

(2) The Central Statistical Organisation: When the history of India’s economic cycles is written for this period, much of the blame must be and will be assigned to this organisation for creating a false perception of ‘all is well’ about the Indian economy. Its ‘no resemblance to reality’ growth prints of 7% or higher had robbed all of the sense of urgency, most of all in the Indian government. Further, it has done nothing to remove the suspicions that still linger over its methodology.

All that we receive, every now and then, from commentators is a reassurance that there is no mala fide in Indian economic growth numbers and that the CSO leadership scores high on integrity. That is not even an issue for discussion.

In fact, it is well known that it makes no sense to attribute malice to something that could be explained by incompetence.

That the Indian economy grew 6.4% in 2013-14 is no laughing matter. But, it is laughable. It is very hard to reconcile with lots of statistics – from mobile phone sales to airline traffic to rail freight traffic to cement production to current account deficit shrinkage, etc.  The growth rate was close to 4.0% then.

Similarly, with credit growth to industries contracting, with private capital formation rates shrinking, with production in infrastructure industries sluggish at best and contracting at worst, with demand for electricity not rising, it is hard to see that the economy is growing at 7.5%.

The CSO might have more data now on the corporate sector, etc., But, how the data are processed also matters. For outsiders, it remains a black box.

The CSO has played a very big role in inducing a perception of ‘all is normal and healthy in the economy’ in the government. Indeed, the biggest contribution that any one can make to any country is to induce a sense of crisis in policymakers. That is what leads to policy reforms and action. Where possible and realistic, patriotic citizens must ensure that the policymakers that have their ears are gripped by a sense of crisis.

The banking crisis, the falling investment rates and the credit off-take were perfect crisis ingredients in India. But, the CSO did a lot to remove the crisis-effect of these on the government. That is a very big disservice it has done to India. I hope historians would take note of it and record it with adequate prominence.

(3) The Reserve Bank of India (RBI):  The Indian central bank gets a free pass from the chattering classes, for the most part, especially from those based in Mumbai. It gets the benefit of doubt from them whereas the government in Delhi does not. Delhi is home to politicians who are not like us. Mumbai is home to the RBI which is led by people like us – elites, educated and thoughtful and therefore, it should be treated with respect and given the benefit of doubt, than not.

RBI adopted the inflation targeting regime when the rest of the world was having second thoughts on it. It is not a disaster, per se, even though much thought and discussion should have preceded it. That did not happen.

Even I was guilty of not being critical of its adoption because all of us were stung by the experience of five years of continuous annual double-digit inflation under the previous government from 2009 to 2014.

Further, its fiscal policy also undermined the independence of the central bank. Therefore, it is doubly unfortunate that the fiscal dominance of monetary policy and sustained annual double digit inflation for five years raised sympathies for an inflation targeting regime in India too.

But, in a social science subject like economics and policy framework based on a social science like economics, rules are guideposts and not millstones. It is what policymakers make of them. Creative interpretations have been made even in inflation targeting regimes. They can change the weights; they can creatively assume different lags (after all, they are long or short, variable or fixed as we like them).

For a creative reinterpretation of its mandate, ECB is enough example despite a Treaty-defined mandate only for inflation targeting. Not that I endorse what they do.

Yes, a framework does bind and can be an inconvenient one. Also, if someone stretched it once in one direction, on another occasion, another central banker can stretch it in another direction. But, that is an ever-present risk with all regimes.

The risk comes from the framework and from those who interpret and implement them.

A NPA situation bordering on 10% of GDP and a capital formation rate of 25% of GDP are outside the normal deviations that a creative interpretation of the inflation targeting regime was warranted, in my view, in the RBI policy meeting that concluded yesterday.

Hence, the central bank is guilty of being bookish.

Why should Raghuram Rajan have the last laugh? The title of the blog post is a reaction to the stories here and here. This government did an utterly foolish thing and made a spectacle of itself by the manner in which it had him leave office last year. There were far better ways of doing so. That was very bad karma and it is coming home to roost now.

Its current predicament and frustration with the current leadership of RBI are therefore well earned and well deserved.

Government and the RBI – Part 3

The first best world is that the government follows the letter of the Reserve Bank of India (RBI) Act, as amended. That is, it gives inputs in writing which are taken on record.

​The second best world is that there is a direct communication with the Governor formally, before very meeting and it is taken on record.

The third best world is that the RBI Act is amended – the sections pertaining to the Monetary Policy Committee (MPC) – and the Government formally has a non-voting voice in the MPC meetings.

This is third best because the MPC has just been formally launched and this might strike one as a panic and ad-hoc reaction. Basically, it is too soon to amend it. May be, after two years. That is why this is third best on my list.

The fourth best world is what is happening now : CEA+PEA+DEA Secy. meeting MPC non-RBI and not on record. They are government appointees. The appearance of free-will is important. That might be lost here. Indeed, even if they wish to cut rates on their own, it might not be seen that way but seen as succumbing to government pressure.

Look at the optics for the world of financial markets (fair or unfair is a different issue). This is how they would see it:

A new MPC has four meetings and it has not cut interest rates and has become even neutral to hawkish from being accommodative. The government therefore loses it and wants to interfere. It will have implications for the exchange rate, for funds flows, etc. The narrative about India might change for the worse, from the government point of view.

If the Government has to interact with RBI, it can be Finance Secy. and RBI Governor interacting formally. Perhaps, this was suggested and turned down.

In the final analysis, it boils down to 100 basis points of interest rates. Otherwise, I doubt if the Government would be so exercised about this. I really doubt if a rate cut of any magnitude would be so efficacious as to risk walking down a path a little bit without taking into account long-term consequences. Rate cuts in a balance sheet constrained environment are of little use. Even if the current real policy rate is 3.5%, is it too high for an economy that is supposedly growing at 7+%?

Further, given the experience in India with inflation, it is never easy to let down one’s guard on that. Sonal Varma has a nice piece in MINT today on why it is too soon to declare victory on inflation.

This would set a precedent for future governments to flout protocol and norms even more flagrantly. That is in the nature of the times we live in.

We have a stock market that is rich in valuation. It can go ballistic with 100-200 bp. of rate cuts while doing zilch to capital formation in the real economy. The costs are there for a rate cut of such magnitude.

It is not as though the RBI is missing a sure, riskless bet that would benefit the economy and therefore, the government has to step in.

So, I think that the government might have been better off retreating or doing it much more formally so that the personalities involved matter little.

Government-Central Bank interaction

What do other central banks do?

(1) This is what happens in England:

“A representative from the Treasury also sits with the Committee at its meetings. The Treasury representative can discuss policy issues but is not allowed to vote. The purpose is to ensure that the MPC is fully briefed on fiscal policy developments and other aspects of the Government’s economic policies, and that the Chancellor is kept fully informed about monetary policy.​” [Link]

(2) This is what happens in Japan (from the Bank of Japan Act)

Article 4 The Bank of Japan shall, taking into account the fact that currency and monetary control is a component of overall economic policy, always maintain close contact with the government and exchange views sufficiently, so that its currency and monetary control and the basic stance of the government’s economic policy shall be mutually compatible.

(Attendance of Government Representatives)

Article 19 (1) The Minister of Finance or the Minister of State for Economic and Fiscal Policy prescribed in Article 19, paragraph 2 of the Act for Establishment of the Cabinet Office (Act No. 89 of 1999) (referred to as the “Minister of State for Economic and Fiscal Policy” in the following paragraph; in the case where the office is vacant, it shall be assumed by the Prime Minister) may, when necessary, attend and express opinions at Board meetings for monetary control matters, or may designate an official of the Ministry of Finance or the Cabinet Office, respectively, to attend and express opinions at such meetings.

(2) The Minister of Finance, or a delegate designated by him/her, and the Minister of State for Economic and Fiscal Policy, or a delegate designated by him/her, may, when attending the Board meetings for monetary control matters, submit proposals concerning monetary control matters, or request that the Board postpone a vote on proposals on monetary control matters submitted at the meeting until the next Board meeting for monetary control matters.

(3) When a request has been made to postpone a vote as prescribed in the preceding paragraph, the Board shall decide whether or not to accommodate the request, in accordance with the Board’s practice for voting.

(Publication of Transcripts, etc.)

Article 20 (1) After each Board meeting for monetary control matters, the chairperson shall promptly prepare a document describing an outline of the discussion at the meeting in accordance with the decisions made by the Board, and make public the document following its approval at another Board meeting for monetary control matters.

(2) The chairperson shall prepare a transcript of each Board meeting for monetary control matters in accordance with the decisions made by the Board, and make public the transcript after the expiration of a period of time which is determined by the Board as ​appropriate. [Link] and [Link]

Indian government to talk to the Monetary Policy Committee regularly

I did see an interview given by Arvind Subramanian, Chief Economic Advisor to the Indian government, to ‘Business Standard’ last week on how the government would begin the process of providing structured inputs to the Monetary Policy Committee (MPC) of the Reserve Bank of India. Three officials from the Department of Economic Affairs – the Chief Economic Advisor, the Principal Economic Advisor and the Secretary to the Department – would meet with the Monetary Policy Committee members.

That was an interesting proposal. My eyebrows went up but I did not blog on it because last week was too busy.

What was not clear from that interview was the structure of the meeting. For example, would these officials travel to Mumbai and meet with the MPC as a group? Would they invite them to Delhi? Would they meet them in separate groups? RBI members and external members (government nominated) separately?

MINT has an Edit on it this morning. It provides some information on the above questions:

The Union finance ministry has summoned the members of the monetary policy committee (MPC) to New Delhi to discuss government views on interest rate policy. The meeting will be attended by chief economic adviser Arvind Subramanian, principal economic adviser Sanjeev Sanyal and economic affairs secretary Shaktikanta Das. There will be two sessions: one with RBI representatives in the MPC and then one with the outside members, a curious arrangement.

That does not make for good optics.

The Edit argued against the idea and said that the notion of independence had to be preserved. It went on to make a forthright suggestion in the end:

The “structured” meetings with finance ministry officials is, similarly, an idea that needs to be junked.

Government providing inputs to central banks is always controversial although the central bankers (not in India) doing the bidding of the private sector does not attract as much criticism as the government provision of inputs does. This is not a criticism against MINT or about the state of affairs in India but a comment in passing, to suggest that the so-called independence of the central banks has been more of a textbook concept or a concept for Editorial writers, around the world.

If Government pressure happened in any case, isn’t it better that it happened in the open?

If the meetings that are now proposed were junked, would the pressure not be happening?

Isn’t it a bit like black markets in drugs? Drugs are bad. But, given that they are sold anyway, would you want them be sold in the open or behind railway stations in the sidings?

I think this is better than secret communication and expression of government preferences in the media before monetary policy meetings.

The amendments to the Reserve Bank of India Act for the purpose of the constitution of the MPC provide for the Government to share its views, when deemed necessary, in writing:

(9) The Central Government may, if it considers necessary, convey its views in writing to the Monetary Policy Committee from time to time. (Section 45ZI, RBI Act 1934, p. 90 as amended up to June 27, 2016 uploaded by RBI in November 2016)

So, what I would tell the government?

(1) I would not want it to be junked. But, the legislation had not envisaged a structured input provision process. So, the government is deviating from the legislation. It has to acknowledge that.

(2) The meetings can alternate between Delhi and Mumbai as a routine – one here and one there. That would take away the bad optics of ‘being summoned to the Durbar’ in Delhi.

(3) The meetings should be with the full MPC and not in groups.

(4) The legislation calls for the input to be provided in writing and not orally. Hence, these meetings should be Minuted and shared with the public along with the Minutes of the MPC Meeting.

If I am not mistaken, this is how it is done in Japan. They do not summon MPC members to the Office of the Treasury but Treasury officials attend the MPC meetings and voices the views of the government.

That would aid public discourse as to why Government wants lower (or higher rates?!) and what are the arguments it puts forward for it.

That is good for policy discourse, good for the institutional mechanism and even hugely educative for students of economics.

Indeed, it would bury the constant bickering between MoF and RBI on interest rates and it would set a very healthy precedent on how to manage the political economy of turf battles between different arms of policymaking.

(5) Once this process is instituted, no one else in the government – the Minister of Finance, his Deputies, the Minister for Commerce, FinMin bureaucrats and the DEA officials too – should have any public comments on monetary policy and interest rates, etc. There should be a very strict gag order like the one on the red beacons now. For example, this should not be permitted.

The government has an opportunity to convert this into a model institutional arrangement and thus set a healthy precedent for similar such interactions between various arms of the government.

More than the ban on the red beacon, it would be a substantive achievement for the Prime Minister if he were to issue guidelines to MoF as suggested above.


To be fair to governments around the world and not just in India, if central banks maintain a tight monetary policy, the government can also claim that it is hurting its fiscal goals since the cost of capital is high with a tight monetary policy. It is particularly so in India since the government has a fiscal deficit target to meet.

It is fair game for the government then to offer its inputs to the central bank just as the central bank wants the government to maintain a prudent fiscal policy since a lax fiscal policy can undermine the central bank’s inflation mandate.

So, therefore, shouldn’t the Reserve Bank of India also shut up and not talk in public about the need for fiscal prudence ahead of the budget? Instead, it can opt for a private and formal consultation with the Ministry of Finance.