Monetary Policy Committee (MPC) member Jayanth R. Varma was the only dissenter on the February 6-8 assembly of the RBI’s coverage panel, which voted 5-1 to carry the repo rate at 6.5%, arguing that with inflation projected to common 4.5% in 2024-25, a actual interest rate of 2% could be means too excessive to assist drive inflation all the way down to the goal of 4% and ran the risk of hurting financial 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 assertion on the assembly, the minutes launched on Thursday present. “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 financial growth was certainly ‘holding up well’, he mentioned there was, nonetheless, ‘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 noticed.
“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 said, including that it was very important for the MPC to sign 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 famous. “This is particularly telling in rural areas. Inflation has to be restrained to its target for growth to be inclusive and sustained,” he pressured.
Observing that the outlook for the Indian financial system remained extremely delicate to inflation dangers, he mentioned, “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 cost of financial coverage emphasised.
