As policymakers debate the trade-off between growth and inflation while many developed countries stare into recession, two members of the Reserve Bank of India’s six-member Monetary Policy Committee (MPC) – Jayant Varma and Ashima Goyal – have advocated slowing down repo- Rate hikes that hold a different view than the other four members.
The MPC should stop focusing on it any further Tightening of the repo rate and take a break for now, said one of the committee members Jayant R. Varma, according to minutes of the MPC, which met Sept. 28-30. The rate-setting body increased the repo rate by 50 basis points (bps) to 5.90 percent. This was the fourth hike since May this year by the RBI to tame inflation, which has stayed above its 6 percent ceiling for three consecutive quarters.
According to the MPC minutes, Varma voted against the second housing deprivation resolution, saying, “…in my view, the MPC should now pause rather than focus on further tightening.” The committee had decided to continue to focus on the reversing adjustments to ensure future inflation remains on target while supporting growth.
For the first decision on the magnitude of the rate hike, Varma said he was considering three alternatives – 35, 50 and 60 basis points, which correspond to repo rates of 5.75, 5.90 and 6 percent.
In his view, 5.75 percent would be well below the final repo rate, leaving the task of monetary tightening unfinished and requiring another rate hike at the next meeting.
“My preference is clearly an early increase to the 6 percent level I advocated for in the paragraphs above. The majority of MPC went for 5.90 percent, which is only slightly below my preferred rate of 6 percent,” Varma said.
Retail inflation data, which hit 7.4 percent in September, came after the MPC meeting.
With the exception of independent member Ashima Goyal, all other MPC members voted to raise interest rates by 50 basis points at the September policy meeting. Goyal had voted for a 35 basis point increase. “Large increases were required in India to reverse precipitous pandemic-era cuts. With that complete, going slow will now allow policy to be agile and data-driven. Extremes are always dangerous; A 100 percent front load can easily overshoot. Moderation is better,” Goyal had said.
“As I have explained in previous statements, 10 basis points is not essential and I happily agree with the majority of the MPC on this issue. Therefore, I am voting to raise the key interest rate by 50 basis points to 5.90 percent,” Varma had said.
The MPC consists of the Governor of the RBI, two representatives of the central bank and three independent members appointed by the government.
Goyal voted for a 35 basis point rise in the repo rate and said that both the RBI and the Survey of Professional Forecasters (SPF) headline forecasts for the first quarter of fiscal 2023-24 are around 5 percent, implying that the real interest rate will be around 0.75 percent, repo rate will be 5.75 percent.
“This is close to one and may exceed unity if the fall in inflation is larger. This could be dangerous if growth slows. The MPC needs to focus on the real interest rate over the next six months to a year as that is the horizon where monetary policy will have its greatest impact,” Goyal had noted.
Voting for a 50 basis point rate hike, RBI Governor Shakkanta Das said: “The need of the hour is calibrated monetary policy action, with a clear understanding that this is necessary to sustain our medium-term growth prospects.”
Going forward, monetary policy must remain vigilant and nimble based on incoming data and evolving conditions, he said. “We should remain vigilant on the inflation front while strengthening our macroeconomic fundamentals,” Das said.
According to RBI Deputy Governor Michael Patra, frontloading monetary policy can keep inflation expectations firmly anchored and balance demand and supply, thereby easing core inflationary pressures.
This, he noted in the minutes, will also reduce the medium-term growth sacrifice associated with bringing inflation back on target, as this is timed to bolster the domestic economic recovery, which is underway and expected to continue to gain momentum year progresses.
Patra voted to raise the policy repo rate by 50 basis points and maintain the stance of retreating from shelters, the minutes showed.
RBI Executive Director Rajiv Ranjan said that although a rate hike is imminent at the September meeting, the choice between 35 and 50 basis points is close.
“Given the growth-inflation dynamics, I am voting for a 50 basis point hike in the repo rate and continuing the policy stance of retreating accommodation to ensure future inflation stays on target while supporting growth,” he had said the minutes. The next MPC is expected to meet December 5-7.
