The current policy rate of 6.5 per cent is broadly balanced, and any justification for policy easing at this juncture can be misleading, Reserve Bank Governor Shaktikanta Das opined while voting for the status quo on the repo rate in the MPC, where two members advocated rate cut.
The meeting of the Monetary Policy Committee (MPC), which decides on the policy rate, was held from August 6 to 8. On August 8, the Reserve Bank of India (RBI) announced to keep the benchmark interest rate unchanged for the ninth time in a row, saying it cannot afford to look through persisting high food inflation and has to remain vigilant to prevent spillover.
According to the minutes of the last Monetary Policy Committee (MPC) released by the RBI on Thursday, the calibrated increase in policy repo rate by 250 basis points since May 2022 and subsequent change of stance to the withdrawal of accommodation have facilitated gradual disinflation over 2022-23.
“With a forecast of 4.5 per cent headline inflation for 2024-25, the present policy repo rate is broadly in balance and avoids costly sacrifice of domestic economic activity,” the minutes quoted Das as saying.
At this stage, he further said that when durable disinflation to the target is still a work in progress, the issue of equilibrium natural interest rate is premature.
“Policymaking in the real world cannot be based on an abstract, theoretical and model-specific construct, which is unobservable and time-varying. Hence, any justification for policy easing based on so-called high real rates can be misleading,” Das said.
He also observed that inflation is gradually trending down, but the pace is slow and uneven. The durable alignment of inflation to the target of 4 per cent is still some distance away.
Ashima Goyal and Jayanth R Varma had made a case for a 25 basis points reduction in the repo rate while the third external member on the MPC Shashanka Bhide voted for the status quo along with other three members (all RBI officials) — Das, Rajiv Ranjan, and Michael Debabrata Patra.
As per the minutes, Goyal said that even if the economic growth is high, it has to rise to its full potential.
“I vote for a 25 bps cut in the repo rate and a change in the stance to neutral. These are necessary to lower risks of departure from the principles outlined above, which have contributed to policy successes in the last 3 years,” she said.
Varma observed that it is true that disinflation has been protracted, and therefore, restrictive monetary policy has to be maintained for a few more quarters.
“But a real interest rate of 1.5 per cent is sufficiently restrictive in this environment. This means that a reduction of over 50 basis points in the repo rate is needed within a short span of time, but it makes sense to move cautiously in this direction.
“I, therefore, vote to reduce the repo rate by 25 basis points, and to change the stance to neutral,” he said.
RBI deputy governor and MPC member Patra noted that the wedge between headline and food inflation has been widening, and stalling the alignment of the former with the target.
“The MPC of the RBI has committed to align inflation durably to the target. That has not yet been achieved; any faltering from this commitment could undermine the prospects of the Indian economy. Hence, I vote for keeping the policy rate and the stance of withdrawal of accommodation unchanged in this resolution,” Patra said.
RBI executive director and MPC member Ranjan said that at the current juncture, more clarity and definiteness are needed – on the food inflation outlook, spillovers of food price pressures to core inflation, domestic demand and global risks.
“Till then, I will prefer to stay the course and remain cautious and watchful for these uncertainties to play out. Resilient growth gives us the space to remain focussed on inflation and maintain the status quo till some of these risks are mitigated and the trade-offs are minimised,” he said.
Bhide, Ranjan, Patra and Das had also voted to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.
On the other hand, Goyal and Varma voted for a change in stance to neutral.
The next meeting of the MPC is scheduled for October 7 to 9, 2024.
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