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Business News/ Economy / RBI MPC: As Jayanth Verma dissents on rate and stance decision, will policy easing take center stage?
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RBI MPC: As Jayanth Verma dissents on rate and stance decision, will policy easing take center stage?

RBI's external MPC member Jayanth Varma persistently dissented from the prevailing stance advocating for the “withdrawal of accommodation.” Notably, in this instance, he not only dissented but also voted in favor of reducing the repo rate by 25 basis points (bps).

RBI MPC members Shaktikanta Das, Michael Debabrata Patra, Shashanka Bhide, Ashima Goyal and Rajiv Ranjan voted to keep the policy repo rate unchanged in the latest bi-monthly meeting (Photo: HT)Premium
RBI MPC members Shaktikanta Das, Michael Debabrata Patra, Shashanka Bhide, Ashima Goyal and Rajiv Ranjan voted to keep the policy repo rate unchanged in the latest bi-monthly meeting (Photo: HT)

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) decided to maintain a status quo on policy rates for the sixth straight time in its February meeting, citing caution on the inflation trajectory.

While the majority of MPC members leaned towards adopting a wait-and-watch strategy until a resilient disinflationary trend materializes, there appears to be a growing dissenting opinion within the committee.

External MPC member Jayanth Varma persistently dissented from the prevailing stance advocating for the “withdrawal of accommodation." Notably, in this instance, he not only dissented but also voted in favor of reducing the repo rate by 25 basis points (bps). 

Other members, Shaktikanta Das, Michael Debabrata Patra, Shashanka Bhide, Ashima Goyal and Rajiv Ranjan voted to keep the policy repo rate unchanged in the latest bi-monthly meeting.

Read here: RBI MPC Minutes: Job on inflation front not over, ‘last mile’ of disinflation can be sticky; 5 key highlights

Varma believes that with inflation forecast at 4.5% for FY25, a real rate of 2% was unwarranted and 1-1.5% is sufficient, leaving a scope for 50-100 bps of repo rate cuts. He also sees space for easing due to the government’s aggressive fiscal consolidation and his view that the output gap is negative.

“If the potential growth rate of the economy is close to 8%, then the economy is not at risk of overheating in 2024-25. 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," Verma said in the meeting. 

He highlighted that the process of fiscal consolidation was projected to continue in 2024-25, which according to him, opened up space for monetary easing without risking an inflationary spiral. 

“In my view, the time has come for the MPC to send a clear signal that it takes its dual mandate of inflation and growth seriously, and that it would not maintain a real interest rate that is significantly more than what is needed to achieve its target," Verma said.

Also Read: Fresh capex to fuel next leg of growth for Indian economy, inflation to stabilise ahead: RBI Bulletin

The minutes of the meeting also showed that another external member Ashima Goyal, while voting for a pause, saw scope for a rate cut. 

However, according to Nomura, RBI members pushed back against premature policy easing, with Deputy Governor Patra expressing a more bearish growth outlook. 

“In our view, the conversation appears to have shifted from the need for tight monetary policy to pushing back on premature easing, which is a subtle pivot in its own right. On the whole, we think the minutes were dovish," Nomura said in its analysis of MPC minutes.

Nomura believes Ashima Goyal seemed to also be moving towards the rate cut camp, suggesting that the MPC can “wait a bit longer" to let geopolitical or commodity shocks play out, and if the impact is short-lived, then “it would not be necessary to keep rates high" as the inflation projection of 4.5% offers “room to cut".

In contrast, Dr Bhide was more conservative as he emphasised on the need to remain focused on achieving the inflation target in a sustained way, flagging incomplete policy transmission, according to Nomura. Overall, it seems that two of the three external MPC members believe that such high real rates are not needed.

Also Read: Inflation is cooling but RBI has no reason to cut rates before June, say experts

Nomura had earlier flagged a subtle policy pivot at the time of the February policy meeting. 

While the RBI’s bullish growth outlook and reluctance to change the stance to ‘neutral’ may push back against this view, the dissents within the MPC and a more proactive stance on liquidity indicate an eventual policy easing cycle.

The latest minutes show at least two of the six MPC members are likely to vote for a cut in the coming meetings, and cracks emerge within the RBI members on the economic outlook, Nomura said. The discussion on higher potential growth suggests that the MPC is starting to view the output gap as negative despite its strong growth outlook. 

“All else being equal, this should warrant rate cuts, especially if inflationary pressures continue to be benign. We expect growth to undershoot the RBI’s forecasts in FY25 (RBI: 7.0%, Nomura: 6.2%) and the one-year ahead inflation forecast (for Q4 FY25) to also be lower (RBI: 4.7%, Nomura: 4.1%). Consequently, we continue to expect 100 bps in rate cuts cumulatively starting from August," Nomura said.

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Published: 23 Feb 2024, 02:28 PM IST
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