Economy - MPC likely to hold rates; new external members' voting pattern to be closely watched - ICICI Securities

Government announces names of new external members: The bimonthly monetary policy review, which was originally scheduled to be held during Sep 29 - Oct 1, was stalled since the government had not announced the names of new external members on MPC. On 6th Oct'20, the names were announced: Ashima Goyal, Shashanka Bhide and Jayant Varma, each for a term of four years. Subsequently, the RBI announced it will hold the delayed monetary policy review, the first with new external members, during 7-9 Oct'20.

- New members unlikely to alter rate decision: In the Aug'20 policy review, MPC unanimously decided to keep rates unchanged due to high inflation. Going into the Oct'20 review, the last available inflation print is for Aug'20, which is uncomfortably high at 6.7%. Also, inflation has remained above 6% consistently since Dec'19, barring the sole exception of Mar'20. Against this backdrop, we expect MPC to unanimously vote for holding rates and maintaining an accommodative stance.

- We will reserve judgement on new members' views: Since the appointment of new external members was announced, financial media have analysed their views on the economy and assessed that the changed composition is likely to make the committee more dovish. However, we would like to reserve our judgement on the same for now. While Dr. Goyal on certain occasions in the past disagreed with the MPC's decision to hold rates despite high inflation, she also deliberated on the reasons why the committee may have chosen to do so (e.g. higher than expected inflation, extent of fiscal slippage, upcoming budget, etc). Similarly, Dr. Varma has batted for lower rates in the past. However, he also argued that if interest rate cuts are proving to be ineffective, central banks should use unconventional tools such as liquidity injection, buying government bonds to push down yields to 'desired level' and make a 'lower for longer' commitment on interest rates. Interestingly, unconventional measures are outside the MPC's purview. Also, unlike outside experts, MPC members have access to more sophisticated inflation and growth projections, which may influence their voting in an unexpected direction. Hence, we would prefer to observe the new external members' voting and minutes commentary for at least a couple of policy reviews before forming a view.

- MPC likely to provide guidance on inflation and growth: The MPC last provided inflation and growth forecasts in its Feb'20 review. We expect it to now provide the same though with possibly wider confidence intervals.

Source : Equity Bulls

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