MPC internal and external members differ on growth, inflation outlook

Opinion differences between the internal and external members of the Monetary Policy Committee (MPC) continued in the August meeting too, with two external members advocating a rate cut and a change in stance, citing below-potential growth and a high real interest rate.

But the internal members, including Reserve Bank of India (RBI) Governor Shaktikanta Das, gave uncertainty over the inflation outlook, mainly due to food prices, as the reason for keeping the rate and stance unchanged.

“Multiple policy measures during the last few years including digitalisation, tax reforms, and a step up in infrastructure investment have in my view boosted the potential growth rate of the Indian economy to at least 8 per cent,” External Member Jayanth R Varma said. He said the real interest rate in the economy was 2.1 per cent, as the projected inflation for the first quarter of 2025-26 was 4.4 per cent and said a real rate of 1.5 per cent was 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,” Varma added.

Four of the six members of the MPC voted for the status quo on the rate and stance. Varma and External Member Ashima Goyal voted for a 25-basis point reduction in the interest rate along with a change in the stance to “neutral” from the current “withdrawal of accommodation”.

 

“There are some negative signals for Indian growth also. Early results of listed private manufacturing companies show sales and profits softened in Q1 FY25,” Goyal said.

“Overall Indian growth is resilient, but it is still below potential … Even if growth is high, it has to rise to its full potential,” she added.

Das said steady growth impulses are allowing monetary policy to unambiguously focus on supporting a sustained descent of inflation to the target.

“India is treading on a steady growth path driven primarily by domestic factors. High-frequency indicators suggest the momentum of activity witnessed during Q4FY24 continued during Q1FY25, though with some slowdown in corporate profits, lower general government expenditure and core industries output,” Das said.

Das said with food inflation pressures showing little sign of abatement in the near term and household inflation expectations picking up, monetary policy had to remain vigilant.

Deputy Governor Michael Patra also warned about the spillover effects of food inflation.

“Higher trend food inflation is spilling over into inflation expectations of households and consumer confidence,” Patra said, adding the wedge between headline and food inflation had been widening, and stalling the alignment of the former with the target.

Patra was of the view that output in the economy was ahead of potential output, which needed vigilance on the demand side.

“Potential output is now rising faster than its pre-pandemic pace; even so, a positive output gap has opened up -- actual output is running ahead of potential output -- warranting vigil on aggregate demand developments,” he said.

Internal Member Rajiv Ranjan also sounded confident that growth will hold up in 2024-25.

“…the growth of the Indian economy is likely to be sustained by all growth drivers working in tandem…On the other hand, the inflation outlook remains uncertain,” Ranjan said.

Both Das and Ranjan said the core inflation rate had bottomed out.

Shashanka Bhide was the only external member who voted for the status quo, like the internal members.

“A progressive decline in food inflation would be necessary to achieve the 4 per cent headline inflation which can be sustained,” Bhide said, adding high food inflation would hit growth adversely as it affected consumption and required restrictive monetary policy to soften core inflation.

This was the last monetary policy meeting of all the three external members because they have a fixed, non-extendable term of four years.

The next policy review meeting, which will see new external members, is scheduled for October 7-9.