By Swati Bhat
MUMBAI – The Reserve Bank of India’s rate panel has diverged further in its views on the need for high interest rates to tame inflation, with some fearing economic growth is being sacrificed, minutes of the latest monetary policy meeting released on Friday showed.
The RBI’s six monetary policy committee (MPC) members, split equally between internal and external members, kept the repo rate unchanged at 6.50% for an eighth straight meeting earlier this month.
But two external members voted for a 25 basis points rate cut and a change in the policy stance to ‘neutral’ from ‘withdrawal of accommodation’.
Ashima Goyal, voting for a cut for the first time, said inflation itself is the best measure of potential growth in Indian conditions of growth transition.
“If headline inflation is approaching the target and core inflation is below target, and incoming data supports this, it implies growth is below potential and NIR (neutral real policy rate) above neutral; so real policy rates can safely fall”.
Based on average inflation in this fiscal year, the current real rate is around 2%, much higher than the neutral real rate of 1%, which is ideal for the economy, Goyal said.
Annual retail inflation dropped to 4.75% in May from 4.83% in April, while core inflation hit a record low of 3.12%. Headline inflation is expected to average 4.5% this fiscal year and the RBI’s target is 4%.
Professional forecasters surveyed by the RBI have projected 2025/26 and 2024/25 growth to be 0.75% below 2023/24, said Jayanth Varma, voting for a rate cut for the second straight meeting.
“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.”
Most members who voted to hold rates believe food inflation remains volatile and needs careful monitoring.
Food prices, which account for nearly half of the overall consumer price basket, have been accelerating at more than 8% since last November, and clocked about 8.7% growth in April and May.
“Food prices are holding back any consideration of possible changes in the monetary policy stance,” Deputy Governor Michael Patra wrote.
The growth outlook for 2024-25 remains upbeat as economic activity kept its momentum, Governor Shaktikanta Das said.
The economy rose at a faster-than-expected pace of 7.8% on year in the first three months of 2024.
“Resilient growth creates space for monetary policy to focus unambiguously on inflation … Any hasty action in a different direction will cause more harm than good,” Das said.
(Reporting by Swati Bhat; Editing by Savio D’Souza)
