 "RBI, Reserve Bank of India")
Two external members of the six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) have made a strong pitch for cutting the policy repo rate, held at 6.5 per cent since February 2023, minutes of the June meeting released on Friday showed.
These two members also favoured change in the policy stance from withdrawal of accommodation to neutral.
Internal members, however, cited food inflation risk for maintaining the status quo and said the last mile of disinflation has been slow.
“Status quoism is praised as being cautious,” said Ashima Goyal, one of the external members who voted for a 25 basis points cut to the repo rate and a change in the stance to neutral.
Countering the argument that robust growth gives space for monetary policy to remain tight, Goyal said growth is below potential and may slow further since consumption remains weak.
“Reducing unemployment is important for political and financial stability. Without a rise in productive employment, aggressive redistribution becomes more likely and may provoke a flight of wealth taking India back to the stagnant seventies,” she cautioned.
Goyal also said the neutral real policy rate (NIR) is around unity in Indian conditions of high unemployment and an ongoing transition to higher productivity employment.
“Falling inflation has raised real repo above unity. This will reduce real growth rate with a lag,” she said.
Jayanth R Varma, who had voted for rate cut and change in stance to neutral for the last few policy meetings maintained his view in the June meeting too.
Varma expressed concern about the growth sacrifice in 2024-25 induced by restrictive monetary policy.
“It now appears that the maintenance of restrictive policy for an unwarrantedly long will lead to a growth sacrifice in 2025-26 as well,” Varma said.
He said the current real policy rate of around 2 per cent (based on projected inflation) is well above the level needed to glide inflation to its target.
RBI governor Shaktikanta Das reiterated the need for maintaining the status quo due to “persistently high food inflation”.
“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 4.0 per cent,” Das warned.
Das said the impact of exceptionally warm summer months on output of certain perishables, a likely rabi production shortfall in some pulses and vegetables, particularly potatoes and onions, and the upward revisions in milk prices, warrant close monitoring while emphasising on the importance of inflation durably aligned to the target of 4 per cent.
While CPI inflation softened to 4.7 per cent in May 2024, the lowest in the last 12 months, food inflation (y-o-y) remained unchanged at 7.9 per cent in May.
Deputy governor Michael Patra said the speed of the easing of inflation has been disappointing so far and that the monetary policy can remain neutral to growth at this juncture and stay focused on aligning inflation to the target.
“The Indian economy remains hostage to intersecting food price shocks. Their repetitive occurrence calls for intensifying monetary policy vigil to ward off spill overs to other components of inflation and to expectations,” Patra said, adding food prices are holding back any consideration of possible changes in the monetary policy stance.
Justifying the prolonged status quo, Rajiv Ranjan, another internal member said, “The inertia of inaction should not drive us to action.”
“The growth-inflation mix at the current juncture allows us to move more cautiously on the inflation front,” Ranjan added.
Shashanka Bhide -- the only external member who voted for a status quo -- said the rise in projected inflation rate above the 4.5 per cent mark in H2 of the financial year reflects the underlying price pressures, which if not addressed would not meet the policy goal.
“As a major part of these price pressures relate to food inflation, a watchful approach is appropriate to ensure that there are no spill overs of high food inflation to the prices of the other items in the consumption basket,” Bhide said.
All eyes now turn to the next meeting of the MPC which is scheduled from August 6 to 8, 2024. In case one more member votes in favour of rate cut, then the RBI governor, as the chair of the committee, will have the casting vote to break the tie -- something never happened since the inception of MPC in October 2016.
