Ashima Goyal and Jayanth R. Varma, the two external members of the Monetary Policy Committee (MPC) who voted as a minority for a 0.25% rate cut at the last MPC meeting earlier this month, had warned about the rising risks of ‘status quosim’ and ‘growth sacrifice’ as a result of the Reserve Bank of India (RBI) persisting with its tight monetary policy approach, the minutes of the June 5-7 meeting released by the RBI on Friday show.
“Headline inflation has been around 5% since January... while core inflation has been below 4% since December 2023. Volatile commodity prices, El Nino and heat waves have not been able to reverse the approach to target,” Dr. Goyal wrote in her statement. “The headline inflation projection of 4.5% for 2024-25 gives an average real repo rate of 2% implying that the real repo rate will be above neutral for too long if the repo rate stays unchanged,” she pointed out.
Stating that slowing inflation had raised real repo above unity, she said this would reduce real growth rate with a lag. “Expected growth is around 7% in 2024-25 below the 8% achieved in 2023-24. Status quoism is praised as being cautious. But if doing nothing distorts real variables it aggravates shocks instead of smoothing them and raises risk,” she asserted.
She said the volatilities facing policy in April had moderated. Global uncertainties continued, but the world seemed to have learnt to live with them. Output and trade growth were improving. Conflicts had been contained and international oil prices that are important for India were softening despite extension of OPEC oil cuts, pointing to a reduction in OPEC’s monopoly power.
“Although global commodity inflation is mixed, palm oil inflation, that affects many consumer goods costs in India, is softening,” she stated.
“The good monsoon predicted has already set in and will likely reduce food inflation. The elections are over. Results suggest political stability but also policy continuity rather than disruptive changes. India gets a credible opposition, which strengthens democracy,” she added.
“Even so, a conservative government with a good implementation record will return and is likely to continue with fiscal consolidation through a better composition of expenditure and other short and long-term cost reducing supply-side reforms,” she cited as reasons for voting for a rate cut.
Emphasising that a durable approach to the inflation target was consistent with a transient rise in inflation, she said it was necessary to avoid the mistake of 2015 when international crude oil prices fell substantially but the fear that they would rise again prevented an adequate cut in the policy rate. “Real interest rates rose substantially and hurt growth.”
Mr. Varma said: “I expressed concern about the growth sacrifice in 2024-25 induced by restrictive monetary policy. It now appears that the maintenance of restrictive policy for unwarrantedly long will lead to a growth sacrifice in 2025-26 as well.”
“Professional forecasters surveyed by the RBI are projecting growth both in 2025-26 and in 2024-25 to be lower than in 2023-24 by more than 0.75%, and lower than the potential growth rate (of say 8%) by more than 1%,” he added.
“This is an unacceptably high growth sacrifice considering that headline inflation is projected to be only about 0.5% above target, and core inflation is extremely benign,” he further said.
‘Hostage to food price shocks’
However, the RBI’s Deputy Governor overseeing monetary policy Michael Debabrata Patra said with output in broad balance in relation to its potential, monetary policy could remain neutral to growth at this juncture and stay focused on aligning inflation to the target. “That objective remains incomplete, which can undermine medium-term growth prospects,” he emphasised.
“The speed of the easing of inflation has been disappointing so far, even from a cross-country perspective. Food prices are persisting for too long as the principal impediment to a faster disinflation. The Indian economy remains hostage to intersecting food price shocks.”
Food prices, he underlined, were “holding back any consideration of possible changes in the monetary policy stance”.
Governor Shaktikanta Das said with persistently high food inflation, it would be in order to continue with the disinflationary policy stance.
“Any hasty action in a different direction will cause more harm than good. It is important that inflation is durably aligned to the target of 4%. Price stability is the bedrock for high and sustainable growth,” he reasoned.
Published - June 21, 2024 09:14 pm IST
