RBI Monetary Policy: Split Vote Portends Interesting Times For MPC In 2023

The RBI's Monetary Policy Committee decided on Wednesday to hike the repo rate by 25 basis points and maintain the policy stance at withdrawal of accommodation.

There were no surprises here, but the voting pattern of 4–2 for both these decisions shows that dissent is growing within the committee on what the monetary policy should be going ahead. 

Ashima Goyal and Jayanth R Varma dissented on the need for a rate increase and against continuing with withdrawal of accommodation as the policy stance. The dissent within the committee has been brewing for a while and could well prove to be prescient signals for future actions of the MPC.

It is important to note that Varma was the first person to call for a change in the wording of the monetary policy stance, when it was cited as 'accommodative' in a number of meetings before the committee changed the wording to 'withdrawal of accommodation' in May 2022. He has also been consistently batting in favour of a shift in stance, from withdrawal of accommodation to neutral, since the Aug. 5, 2022 policy meeting. 

Similarly, Goyal was the first to push for a lower repo rate hike of 35 bps on Sept. 30, 2022, when the majority voted for a 50 bps increase. This proved to be a prescient indicator for markets as Dec. 7, 2022, delivered a 35 bps repo rate hike, followed by an even smaller 25 bps cut on Wednesday.

For those policy watchers, who go beyond the headline changes in rates and stance, the voting pattern and commentary of individual members provide additional insights into how monetary policy will evolve going ahead. 

Let us look at just the data for the period when the current committee has been in place with external members—Varma, Goyal and Shashanka Bhide—joining in October 2020, which was at the peak of the Covid-19 pandemic.

In the 16 meetings that have been held since, Varma has voted nine times against the wording of the stance and, in recent times, has called for a shift to the neutral stance instead of continuing with withdrawal of accommodation. On the repo rate, he has dissented against the last two repo rate hikes—35 bps in December and 25 bps on Wednesday.

In the same period, Goyal has voted twice against the stance being maintained at withdrawal of accommodation in December and on Wednesday. She was the first member of the panel to vote for a lower 35 bps repo rate hike in September and voted against the rate hike on Wednesday.

Bhide has consistently voted in line with the majority view of the MPC on rate change and stance since October 2020.

During this period since October 2020, the RBI members have all voted in tandem with the final decision on repo rate and stance change. But, this is not to say that RBI members have always voted in sync with each other.

Michael Debabrata Patra, who is now the deputy governor of the RBI, has voted against the then deputy governor and governor of the RBI on multiple occasions in 2017 and 2018, when he was an executive director.

Similarly, Viral Acharya, who was the deputy governor of the RBI, also voted against the other RBI members of the panel in 2019. 

This shows that within the MPC, each person has the right to express their view and vote accordingly, regardless of whether they are an RBI member or an external member appointed by the government. 

Ahead of the monetary policy meeting, while there was a wide expectation that the MPC will hike rates by 25 bps, there was a small but vocal minority suggesting that the RBI should not raise rate or signal that this was the last of this cycle. A few had called for the MPC to announce a shift in the stance to neutral from withdrawal of accommodation.

This expectation was also reflected in the post-policy press conference, where most media personnel were curious on why the RBI had refused to definitely signal a pause.

This divergence in expectations stems from the expectation that headline retail inflation will remain within the upper band of the 2–6% target range for monetary policy through 2023–24, even if it trends above the mid-point of 4%.

There is also a view that the RBI has already hiked rates enough and can afford to take a breather to let past actions play through the system, and also watch the rate increases by global central banks, such as the U.S. Federal Reserve, before acting again. 

The minutes of this meeting will be carefully parsed for clues on a shift in stance and pause on rates when it is released on Feb. 22. 

It could provide insights on how each of the four majority members thinks on the need for future rate hikes or whether they believe this can be the last one of this rate cycle.

If there is a sense that the RBI members sound dovish in the minutes, then we could see markers, and banks assume that we are at the peak of this rate hike cycle, regardless of Das avoiding a clear answer on the 'pause' question.

This leaves the stage open for a variety of permutations and combinations for upcoming policy meetings starting April. 

Varma and Goyal are likely to continue with their dissent against stance remaining at withdrawal of accommodation, as they have been indicating since August and December, respectively. It is also likely based on Wednesday's voting pattern that they will vote against any further rate hikes.

All the four remaining members—the three RBI members and Bhide—in their past minutes, have been constantly speaking about focusing on high core consumer price index inflation along with the target headline inflation. They have also flagged the risks arising out of food and fuel inflation, along with concerns that any easing in inflation may turn out to be transient.

Their views in the minutes of this meeting will show whether they have greater confidence in the easing inflation cycle and fall in core CPI, along with confidence in the economic growth trajectory.

In case that happens, we could well see more members shift track and vote in tandem with Goyal and Varma in April. This could lead to a majority decision or unanimous decision in favour of a pause on rates, with guidance indicating readiness to act against inflation and/or a shift to neutral stance.

There is always the outside possibility that we could see just one of these members join ranks with Goyal and Varma, leading to a split 3-3 vote.

This can lead to the unprecedented use of the 'casting vote' by RBI Governor Shaktikanta Das, which means that in case of a tie in voting, the RBI chief's vote becomes the deciding vote. 

This hasn't happened ever since the MPC first met in September 2016. 

In a sense, the casting vote ensures that there is a greater attempt within the MPC to find common ground before the actual policy decision is announced. This is because policy watchers tend to pay close attention to the voting patterns and verbiage of every member of the panel, and any perceived dissent or differences can be interpreted as policy signs. 

Any use of the casting vote could well be perceived negatively by many market players and policy watchers, who would be looking for certainty on the future rate trajectory in the country. 

At such a delicate point, when the country has emerged better than other economies on the growth and inflation front, the RBI—led by Das—would be wary of showcasing a split in the MPC.

But, at the same time, that cannot be the reason for not using it if the RBI believes that they have a visibility on the economy that suggests need to take a call which varies from other members of the panel. 

The year ahead will be interesting from a monetary policy perspective, especially if the inflation trends lower as is widely expected.

In such a scenario, brace for more noisy MPC meetings with all possible scenarios on the table for rates and stance change, including a surprise use of the casting vote by Das. 

T Bijoy Idicheriah is a senior financial journalist, who has been writing on the world of banking and central banking for 17 years.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.