The 6-0 unanimity shock that foxed financial markets

Markets were supposed to be shocked by the Monetary Policy Committee's decision to maintain status quo on interest rate as no economist publicly forecast it. But they were not.

Why? There was a bigger shock than the actual rate decision – the unanimity in the vote. That even a known dove in the Monetary Policy Committee, Prof. Ravindra Dholakia, voted along with his five colleagues for the pause conveys a message that is stronger than what Governor Shaktikanta Das had for the world. Economists and traders based their cut mostly on the need to revive slumping growth and what’s happening around the world. From the Federal Reserve onward, every leading central bank is working to get growth back.

Some selective reading also backfires! After delivering a cut in October to boost growth, Das said the MPC would `continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.’ It is possible that the market got carried away by the first part of the sentence and ignored the rest. Furthermore, traders believed in the theory of ‘co-operation between RBI and the government’ rather than emerging facts.


Was it group behaviour that was to be blamed, or the veering of the MPC from what the popular belief was?

FACTS
a) Retail inflation rose to a 16-month high in October to 4.6%, breaching the inflation target of 4% in a band of 2 percentage points.

b) Growth rate plunged to a six year low of 4.5%.

c) Telecom tariff rise contributing to 20 basis points to future inflation.

d) Three-month ahead inflation expectation climbs 120 basis points, and 1-year 180 basis points.

e) Lower state revenues likely leading to fiscal breach!

Although no economist missed any of these emerging factors, it appears that they believed the Das - government relationship would trump facts.

The unanimity reflects that MPC is more wedded to its mandate of keeping inflation at 4% than `mechanically’ acting to do its might to push growth. It appears that it not only factored in prices, but also the role of the fiscal slippage.

While FM Nirmala Sitharaman recently said she would let markets speculate on the breach of fiscal deficit target of 3.3 percent, MPC gave a hint. “GST collections so far have fallen below the budgeted targets and a similar scenario in direct tax and customs duty collections cannot be ruled out,’’ said Governor Das. “It is also likely that the government may initiate some more counter-cyclical fiscal and other measures to arrest the slowdown. The forthcoming union budget will provide greater clarity on all these aspects.’’ It is more bureaucratese, than an eloquent essay of an economist!

When revenues fall short, it is obvious borrowings could shoot past the target, pressuring interest rates. But the government has divestment and strategic stake sale lined up that could fill in the shortfall, though past experience leaves a lot to be desired.

Is there an indication that a massive dose of fiscal push is round the corner? Is it the MPC wants to keep the powder dry?

It is time to ponder over the unanimity. But which one? That of the economists, or of the MPC?