Count-counterpoint: MPC's external members must have the courage to dissent, disagreement drives course correction

Today, even as you read this, RBI's Monetary Policy Committee (MPC) is sitting down for another 3-day meeting to decide how best to square the circle. In plain language, it must decide how best to appear confident about the future trajectory of growth and inflation while framing policy. It faces a stark choice: hold rates steady and risk a more persistent inflation problem or raise rates and risk choking growth.

From a Goldilocks moment to a perfect storm. That's been the story of the economy in recent times. So, over the next 2 days, MPC must mull over what explains the metamorphosis: domestic factors or external ones? As the committee responsible for monetary policy, did its actions contribute to where we find ourselves today, with growth falling and inflation rising? And, following from that, what, if anything, can it do now?

The first question is easily answered. It is largely external factors that have played spoilsport in India's Goldilocks story. It's when we turn to the second and third questions that things get a little more complicated. RBI's mandate under inflation-targeting regime is unambiguous. It is to ensure 'price stability, keeping in mind the objective of growth'. Going by that, the writing has been on the wall for a while. Retail inflation is up for the 5th consecutive month to 4.4% in June, crossing the 4% mark for the first time in 17 months, and WPI is up by 9.87%.


If primacy is to be accorded to price stability, MPC should have taken a more hawkish stance much earlier, especially since growth, though slowing, is still holding up well. By all estimates, GDP growth is expected to cross 6.5% this year. High-frequency data corroborates this encouraging picture. Core sector grew at the fastest pace in 5 months in June while IIP was at a 22-month high.

Meanwhile, an increase in food and oil prices, the latter being the effect of multiple rounds of fuel price hikes (carefully timed till after state elections), cannot be wished away. Add to that a deficit monsoon, which is likely to put more pressure on food prices in the coming months, the prospect of a continued impasse in West Asia, and a weakening rupee, and inflation is likely to rise further. True, benchmark yields have not risen by much, but that is largely on account of careful market grooming by RBI, ensuring ample liquidity near bond auction dates and summarily rejecting bids when rates are above its comfort level.

Globally, yields have risen. In US, 30-year yield has reached its highest level since 2007. Crude prices may have retracted after briefly touching $100 a barrel, but the fragility of the global oil market means central banks cannot afford to relax their guard. Add to that the threat of fresh tariffs as Trump looks for ways to circumvent Supreme Court's ruling against earlier tariff hikes, and the inflation outlook is bleak.

In normal circumstances, one would expect MPC to respond by hiking the policy repo rate, which is the benchmark for all other rates in the economy. Except that these are not normal times! We are at a 'hinge point in history', says Fed chair Kevin Warsh, when 'inflation is a choice'.

So, what can MPC do? 'Sternly staring at inflation until it melts before our withering gaze is not an option,' quipped Fed governor Christopher Waller. That's far truer for a poor country like India. So even as MPC may opt to bide its time, like Fed's Federal Open Market Committee (FOMC) and Bank of England's MPC, it must not rest content with that. Inaction on the rate front must go together with a strong message that RBI will act to keep prices in check. In brief, there should be a change in stance, along with an assurance from the governor that RBI's liquidity operations will be in tandem with that stance - not at odds with MPC's statement.

This is where MPC's external members can make a difference. Unlike US, where dissent among FOMC members is not unknown - consider the 9-3 split vote at its recent meet - or the 6-3 vote in the case of Bank of England's MPC, there is much less dissent from external members in India.

We've seen little or no evidence of the 'good family fight' that, in Warsh's words, is key to sound decision-making. Consider this: while 10 of the 14 FOMC meetings held since December 2024 saw members differ on rate action, only two MPC meetings held in India during the same period saw such dissent.

In many ways, this defeats the very purpose of having external members. Agreed, the composition of MPC, with RBI governor being given a casting vote in the evenly matched 6-member committee, means their dissent doesn't count for much. But as recent events have shown us, dissent, whether in politics or monetary policy, can trigger much-needed course correction. It shows MPC and RBI as less all-knowing, and thereby ensures markets are better prepared for any contingency.