Monetary Policy Committee (MPC) member Jayanth R. Varma was the sole dissenter at the February 6-8 meeting of the RBI’s policy panel, which voted 5-1 to hold the repo rate at 6.5%, arguing that with inflation projected to average 4.5% in 2024-25, a real interest rate of 2% would be way too high to help drive inflation down to the target of 4% and ran the risk of hurting economic growth.
“If the potential growth rate of the economy is close to 8%, then the economy is not at risk of overheating in 2024-25,” Mr. Varma contended in his statement at the meeting, the minutes released on Thursday show. “A real interest rate of 1-1.5% would then be sufficient to glide inflation to the target of 4%. A real interest rate of 2% creates the very real risk of turning growth pessimism into a self fulfilling prophecy,” he asserted.
Noting that economic growth was indeed ‘holding up well’, he said there was, however, ‘no evidence that the economy was overheating’. “Perhaps, the majority of the MPC worry that the output gap has already closed, and that the projected growth rate of 7% for 2024-25 exceeds the growth potential of the Indian economy. I do not think that such growth pessimism is warranted,” he had observed.
“It must also be borne in mind that the process of fiscal consolidation is projected to continue in 2024-25. This opens up space for monetary easing without risking an inflationary spiral,” Mr. Varma stated, adding that it was vital for the MPC to signal that it took “its dual mandate of inflation and growth seriously”. “I therefore vote to reduce the repo rate by 25 basis points, and to change the stance to neutral.”
RBI Deputy Governor Michael Debabrata Patra was emphatic “that monetary policy must remain restrictive and maintain downward pressure on inflation while minimising the output costs of disinflation”.
“Private consumption, which accounts for 57% of GDP, is languishing under the strain of still elevated food inflation,” he noted. “This is particularly telling in rural areas. Inflation has to be restrained to its target for growth to be inclusive and sustained,” he stressed.
Observing that the outlook for the Indian economy remained highly sensitive to inflation risks, he said, “High inflation erodes purchasing power, especially for those least protected against the higher costs of essentials like food. Restoring price stability is beneficial for all”.
“It is only when inflation subsides and stays close to the target lastingly that policy restraint can be eased,” the RBI’s MPC member in charge of monetary policy emphasised.
