The Reserve Bank's monetary policy committee meeting happened on August 8 and the minutes of that meeting was released on Friday (Aug 20). RBI Governor Shaktikanta Das has highlighted that continued policy support with a focus on revival and sustenance of growth is indeed the most desirable and judicious policy option at the moment.

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The apex bank in the policy decided to keep the benchmark interest rates unchanged and it did not even change its stance. The Reserve Bank governor highlighted that on the whole, the economy still requires support in terms of maintaining congenial, financial, and fiscal boosters and questioned whether it would be wise to really pull the rug and let the economy tumble at such a critical juncture. The governor pointed out that there was a possibility of a third wave and, therefore, to pull the rug at this moment is not appropriate. It was actually a rhetorical question from the governor.

He also pointed out that in September and October, inflation went above 7.3 percent, and the monetary policy committee said that they have to look through it and thereafter inflation fell towards the 4 percent mark. They were making a similar judgement call that the 6.3 percent of May, and the 6.2 percent of June were transitory impact, and therefore, they have to look through.

However, the biggest opposition came from Dr. Jayanth Varma and he voted against the accommodative stance and made some very effective points.

According to him, the COVID is like tuberculosis, it kills people, but it doesn't kill the economy and therefore, to use the monetary policy instrument is perhaps not warranted.

He pointed that if the pandemic went on for three to five years, then were we going to keep interest rates that low for such a long time? That was his first objection. His second objection was that monetary policy affects everyone, everyone pays the same price for money or are paid a lower price, but COVID impacts some sectors like the hospitality sector, it affects some regions like maybe Kerala or densely populated cities, like Mumbai, or Delhi. So, he said what was the point in having a widespread instrument for something which hurts in pieces?

He also said that indeed monetary accommodation appeared to be stimulating asset price inflation to a greater extent than it was mitigating distress in the economy (others also made this statement including the US Fed). This was the only statement in the entire minutes, which clearly pointed to a worry over the asset price inflation, something seen in the Fed minutes as well, that were announced earlier this week. He went on to show that inflationary pressures were showing persistence. But, his real opposition was that the monetary policy committee was only being asked to vote on the repo it it's not even told that its mandate was reverse repo and yet he said the governor had mentioned the reverse repo statement in the monetary policy statement.

The policy statement came from all the members and they were not allowed to vote on the reverse repo. Since it was a part of the statement, he was choosing to vote and said that it should not remained as low as 3.35 percent. That was a pointed attack coming from Dr. Jayanth Varma not just on the policy rate, but even a bit of angst that the Committee was not being allowed to vote on it, and yet the rate was finding place in the statement. So that's a little broader than just a comment on inflation, though he was worried that inflation could get persistent. So, he wanted the repo rate to be maintained at 4 percent that was the rate on which the MPC votes, but he had a problem that the difference between the repo rate and the reverse repo is too wide. It is 65 basis points, and he wanted it to get narrower, which meant they were normalising monetary policy.

According to him, even at 4 percent, it was a negative interest rate, inflation was at six but people were getting only 4 percent for their money and therefore there was a negative spread.

"We are losing out by keeping our money in the bank because at the end of one year, it's going to buy less than what it buys now, which is the meaning of negative real return."

But he said that this level of current rates was appropriate for reviving economic growth without excessive risk of an inflationary spiral.

Mridul Sagar who sounded very hawkish last time, but he went on to argue that growth was actually fragile and he pointed out that there was considerable capacity underutilisation in the economy and therefore, inflationary spiral perhaps was not the immediate problem. Therefore, he voted for accommodative stance and against any rate hikes.

Dr. Michael Patra said there was a likelihood of inflation fears getting entrenched, but not just yet and at the moment was growth, which was fragile, and needed help and therefore, accommodative stance. Similarly largely dovish statements came from Ashima Goyal and Shashanka Bhide, the other two external members.

To discuss all this in detail, CNBC-TV18 spoke with Kaushik Das, Chief Economist, Deutsche Bank; Mahendra Jajoo, CIO-Fixed Income, Mirae Asset Investment; Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank; and Soumya Kanti Ghosh, Group CEA, SBI.

Are you getting a sense at all that, with such a strong opposition coming from Dr. Varma and a kind of a tepid cat on the wall from Mridul Sagar, that maybe the MPC was in the mood to get to normalising, to get a 'you know', to probably 'redo raising the reverse repo' in this year itself?

Das said, ”I want to make two points on this. The first point is, you know, as far as the way I look at the MPC, the RBI members will always go together, you'll never see division in the RBI members taking a different stance among themselves. So, even if Dr. Mridul Sagar was a little more hawkish in June if you see his statements, it kind of shows that RBI will move in one direction. So, whenever anything has to change, all the three RBI members will be on one side.”

So to some extent, from a market perspective, Jayanth Varma just being the lone dissenter didn't matter much for the markets because nothing will change in the October policy, he added.

The second point was what RBI should be doing and what RBI was going to do in the upcoming policies. As far as what RBI should be doing, he said Professor Varma made a lot of sense that there's no point in keeping reverse repo at 3.35 percent at this level, slowly, RBI should consider increasing.

Bhardwaj said, “There were two members I was looking more closely to - one is Professor Jayanth Varma and Dr Sagar because Dr. Sagar in the previous minutes was slightly hawkish and this time around, what I see is there's a slight softness wherein the concerns on growth have been highlighted and the fact that the risks to inflation are temporary, and we are expecting inflation to be even higher than the target, but below 6 percent, I think that is what Dr Sagar has highlighted.”

“I think there's a touch softness in his minutes this time as compared to last time and, and clearly Professor Varma, we were expecting, the reasons were also very clear and the suggestions that they have made is also something which we as market participants have anyways been saying. So that is something which the markets have absorbed the news? I don't think this is anything incrementally new. If at all, I would say a re-enforcement of pro-growth probably could be marginally positive for the market.

For the entire discussion, watch video