In a welcome move on Tuesday, the Reserve Bank of India released the minutes of the first meeting of the Monetary Policy Committee (MPC). There was considerable interest among observers about the variables each of the MPC members considered before arriving at the decision to cut the repo rate by 25 basis points when they met on October 3 and 4. It was one of those policies where the commentary around the decision was perhaps more important than the decision itself. But while the public dissemination of the MPC's minutes opens the door to a new era of understanding monetary policy decision-making, the absence of detailed commentaries on growth and inflation was disappointing. There were also no indications of what the members thought would happen over the next year.
The first question that everyone wanted an answer to was about the MPC members' stance on inflation - not only how different it was, but also the reasoning they employed. The rate cut was preceded by a sharp fall in headline retail inflation in August but core inflation (without fuel and food) had actually inched up. As it turns out, the minutes did not share enough details about why the MPC, unanimously at that, chose a rate cut. It is true that the MPC favoured shoring up growth more than being concerned by inflation, but questions remain. For example, if inflation was expected to decelerate adequately enough by March 2017, why did the MPC continue to state that there were upside risks to the five per cent target?
Similarly, another big change in the last policy review was the policymakers' downward revision of the real neutral rate. One of the MPC members, Michael D Patra, had stated during the press conference on October 4 that "globally, there is a tendency of the real neutral rate to go down over time… So I would discount 1.5 per cent by 25 basis points and say that 1.25 per cent is the real neutral (rate)." This revision immediately led to the markets expecting another cut soon enough. But the MPC minutes do not carry a single word on this revision. The same holds true for the process of arriving at a unanimous decision. For instance, there were differences in the way participants viewed inflation. Ravindra Dholakia said some of the upside risks to inflation were largely statistical while Mr Patra stated, "This is not to say that the beast has been beaten or its back broken, but there is a turn in its momentum that is exploitable..."
Without more details, the minutes certainly do not provide a better appreciation of the evolving monetary policy stance or even of the issues involved. This may probably be because the MPC met for the first time with barely adequate time between it being formed and the meeting. But, going forward, it might be instructive to look at the US Federal Reserve's minutes released on October 12. Not only were those minutes far more detailed, they were also accompanied by a long summary of economic projections where participants submitted their estimates of the most likely outcomes for real growth, the unemployment rate and inflation for each year from 2016 to 2019 and over the longer run.
