AS POLICY makers discuss the growth versus inflation trade-off with many developed countries staring at a recession, two members of the Reserve Bank of India’s six-member Monetary Policy Committee (MPC) – Jayant Varma and Ashima Goyal — have argued for going slow on Repo rate hikes, taking a different view from the other four members.
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The MPC should stop focusing on further tightening of repo rate and take a pause for now, one of the committee members Jayant R Varma said, according to the minutes of the MPC, which met on September 28-30. The rate-setting panel hiked the repo rate by 50 basis points (bps) to 5.90 per cent. This was the fourth hike since May this year by the RBI to tame inflation which has been above its upper threshold of 6 per cent for three quarters in a trot.
As per the MPC minutes, Varma voted against the second resolution on withdrawal of accommodation and said, “…in my view the MPC should now pause rather than focus on further tightening.” The committee had decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
For the first resolution on the quantum of the rate hike, Varma had said he considered three alternative choices – 35, 50, and 60 bps corresponding to repo rates of 5.75, 5.90 and 6 per cent.
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According to him, 5.75 per cent would be well below the terminal repo rate, leave the task of monetary tightening unfinished, and make it necessary to hike rates again in the next meeting.
“My preference is clearly for a front-loaded hike to the 6 per cent level that I have argued for in the above paragraphs. The majority of the MPC has chosen 5.90 per cent which is only slightly below my preferred rate of 6 per cent,” Varma said.
The data on retail inflation which hit the 7.4 per cent mark in September, came after the MPC meeting.
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Except independent member Ashima Goyal, all other MPC members voted for a 50 bps rate hike in the September policy meeting. Goyal had voted for a 35 bps increase. “Large hikes were required in India to reverse steep pandemic-time cuts. Since that is completed, going slow now will allow policy to be agile and data-based. Extremes are always dangerous; 100 per cent front loading can easily overshoot. Moderation is better,” Goyal had said.
“As I have explained in past statements, 10 basis points is not material and I am happy to go along with the majority of the MPC on this issue. Therefore, I vote in favour of increasing the policy repo rate by 50 basis points to 5.90 percent,” Varma had said.
The MPC comprises the RBI Governor, two officials of the central bank and three government- nominated independent members.
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Voting for a 35 bps rise in the repo rate, Goyal said both RBI and Survey of Professional Forecasters (SPF) headline forecasts for Q1 of FY 2023-24 are around 5 per cent, implying the real rate will be approximately 0.75 per cent with the repo rate at 5.75 per cent.
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“This is almost one, and can exceed unity if the fall in inflation is larger. This could be dangerous if growth slows. The MPC has to focus on the 6 month to one year ahead real rate, as this is the horizon where monetary policy will have its greatest impact,” Goyal had noted.
While voting for a 50-bps rate hike, RBI Governor Shaktikanta Das said, “the need of the hour is calibrated monetary policy action, with a clear understanding that it is required for sustaining our medium-term growth prospects.”
Going forward, monetary policy needs to remain watchful 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 had said.
According to the RBI’s Deputy Governor Michael Patra, front-loading of monetary policy actions can keep inflation expectations firmly anchored and balance demand against supply so that core inflation pressures ease.
This, he noted in the minutes, will also reduce the medium-term growth sacrifice associated with steering inflation back to target because it is being timed into the strengthening of the recovery of the domestic economy that is underway and likely to gather further momentum as the year progresses.
Patra voted for increasing the policy repo rate by 50 bps and for maintaining the stance of withdrawal of accommodation, the minutes showed.
RBI’s Executive Director Rajiv Ranjan said that while a rate hike in the September meeting was imminent, the choice between 35 to 50 bps was a close call.
“Given the growth-inflation dynamics, my vote is for an increase in repo rate by 50 bps and continue with the policy stance of withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth,” he had said in the minutes. The next MPC is scheduled to meet on December 5-7.
