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RBI's MPC Divided on Rate Cut Amid Inflation Concerns

Published 23-06-2024, 05:50 pm

The latest minutes from the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) reveal a sharp divide among its members over the policy repo rate, which has been held at 6.5% since February 2023. Released on Friday, the June meeting minutes show two external members advocating for a rate cut, while internal members emphasize inflation risks as a reason for maintaining the status quo.

External members Ashima Goyal and Jayanth R Varma argue that the current economic conditions warrant a 25 basis point cut in the repo rate and a shift in policy stance from "withdrawal of accommodation" to "neutral." Goyal criticized the cautious approach of maintaining the status quo, pointing out that economic growth is below potential and could slow further due to weak consumption.

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“Reducing unemployment is crucial for both political and financial stability,” Goyal emphasized, warning that without an increase in productive employment, aggressive wealth redistribution could drive the economy back to stagnation reminiscent of the 1970s. She noted that falling inflation has pushed the real repo rate above the neutral level, potentially slowing real growth.

Varma echoed these sentiments, expressing concerns that the prolonged restrictive monetary policy could lead to a significant growth sacrifice in the coming fiscal years. He argued that the current real policy rate of around 2% is excessive given the projected inflation, and could impede the economy's ability to achieve its inflation targets.

However, RBI Governor Shaktikanta Das and other internal members, including Deputy Governor Michael Patra and Rajiv Ranjan, defended the decision to maintain the current rate, citing persistently high food inflation. Das highlighted the risks associated with a premature rate cut, stressing the importance of ensuring inflation remains aligned with the 4% target. He pointed to the impact of unusual weather patterns on food prices and potential shortfalls in certain crops as key factors necessitating continued vigilance.

Patra and Ranjan both emphasized that the pace of disinflation has been slower than expected. Patra remarked that the Indian economy is vulnerable to food price shocks, which necessitate a cautious approach to monetary policy to prevent broader inflationary pressures.

Shashanka Bhide, the only external member who supported maintaining the status quo, underscored the importance of addressing underlying price pressures. He noted that the projected inflation rate above 4.5% in the second half of the financial year reflects significant price pressures, particularly in food, which must be carefully monitored to prevent spillovers to other consumer goods.

As the next MPC meeting, scheduled for August 6-8, 2024, approaches, all eyes are on whether another member will join Goyal and Varma in voting for a rate cut. If so, the RBI Governor will need to cast a tie-breaking vote, a situation that has yet to occur since the MPC's establishment in October 2016.

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