The two external members of the Reserve Bank of India’s Monetary Policy Committee (MPC), who had voted against the majority decision to raise the policy interest rate by 25 basis points earlier this month, had expressed misgivings about the impact that the current monetary policy approach could have on growth, the minutes of the MPC meeting released by the RBI on Wednesday show.
While Ashima Goyal had sought a pause and called for the effects of past monetary tightening to play out, Jayant Varma had cautioned that monetary policy had become complacent about growth and that the economy could end up having to pay a heavy price as a consequence.
Arguing that It was “better to give time for possible softening of both inflation and growth,” Dr. Goyal said she was also in favour of a shift to a neutral stance, which was consistent with response in any direction as required depending on the impact of global and domestic factors on expected inflation.
“Policy, and market adjustments, would be based on incoming data and its effect on the future outlook,” she contended.
Prof. Varma had observed that much of what he had articulated in December when opposing the rate increase at the time, remained valid now as well.
“In the second half of 2021-22, monetary policy was complacent about inflation, and we are paying the price for that in terms of unacceptably high inflation in 2022-23,” he said. “In the second half of 2022-23, monetary policy has, in my view, become complacent about growth, and I fervently hope that we do not pay the price for this in terms of unacceptably low growth in 2023-24,” he had cautioned at the meeting.
“I believe that the 25 basis point rate hike approved by the majority of the MPC is not warranted in the current context of diminished inflationary expectations and heightened growth concerns,” he said, explaining his vote against the decision.
On the stance, Prof. Varma wrote, “I believe that a repo rate of 6.50% very likely overshoots the policy rate needed to achieve price stability, and further tightening is not desirable. I therefore vote against this resolution also.”
Out of the six-member MPC, all three RBI members including Governor Shaktikanta Das and one external member had voted to raise the repo rate by 25 basis points to control high inflation.
Emphasising that the MPC and the RBI must remain unwavering in its commitment to bring down inflation to ensure a decisive and durable moderation in inflation towards the target of 4% over the medium term, while being mindful of growth, Mr. Das stressed that further calibrated monetary policy action was necessary to keep inflation expectations anchored and break the persistence of core inflation while containing second round effects.
“I also believe that we should taper the pace of rate hike in view of two considerations: (i) we need to give time for our past policy actions to work through the system; and (ii) it would be premature to pause, lest we are caught off-guard and need to do a catching up later,” he wrote in his statement.
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