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Business News/ Economy / RBI’s rate-setting panel warns against premature change in policy stance
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RBI’s rate-setting panel warns against premature change in policy stance

A majority of the monetary policy committee’s members aligned with RBI governor Shaktikanta Das in voting for a status-quo on policy rates while continuing efforts to tame inflation

RBI's monetary policy committee should not assume that the job on the inflation front is over, central bank governor Shaktikanta Das said during the panel's rate-setting meeting earlier this month. (Bloomberg)Premium
RBI's monetary policy committee should not assume that the job on the inflation front is over, central bank governor Shaktikanta Das said during the panel's rate-setting meeting earlier this month. (Bloomberg)

Mumbai: Five members of the central bank’s six-member rate-setting committee warned against any premature change in policy action while embarking on the “last mile of disinflation", and voted to keep policy rates unchanged, minutes of its meeting held earlier this month showed.

The monetary policy committee’s (MPC) sixth member Jayanth R. Varma was the lone dissenter, voting for a repo rate cut of 25 basis points.

At the meeting which was held over 6 to 8 February, Reserve Bank of India governor Shaktikanta Das said MPC should not assume that the job on the inflation front was over, while voting for a status quo on policy rates, according to the minutes of the meeting released on Thursday.

“As markets are front-running central banks in anticipation of policy pivots, any premature move may undermine the success achieved so far," Das, who chairs the MPC, said during the meeting. “Policy imperative at the current juncture is to remain focused on achieving the 4% inflation target on a durable basis, keeping in mind the objective of growth."

Consumer price index or CPI-based inflation currently stands at 5.1%, even as RBI’s medium-term target is to bring inflation down to 4%. At its meeting, MPC kept its benchmark interest rate unchanged at 6.5% for the sixth straight time, citing persistent risks from food inflation and incomplete transmission of monetary policy.

Meanwhile, Varma, while voting for a rate cut, argued that a 2% real interest rate was too high, with inflation projected at 4.5% in FY25.

“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," said Varma, a professor of finance and accounting at IIM Ahmedabad. “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."

Rajiv Ranjan, another MPC member and RBI executive director, said neither forward guidance nor pre-emptive policy actions would work during a period of transition.

“Markets are currently running ahead of policymakers worldwide, including (in) India. Any change in policy direction is going to have a multiplier effect. This is particularly tricky considering that transmission has slowed down in the last two months," said Ranjan.

RBI deputy governor and MPC member Michael Patra noted that private consumption, which accounts for 57% of the gross domestic product, has been impacted by elevated food inflation, particularly in rural areas. “The outlook for the Indian economy remains highly sensitive to inflation risks," said Patra.

“Accordingly, monetary policy must remain restrictive and maintain downward pressure on inflation while minimizing the output costs of disinflation. It is only when inflation subsides and stays close to the target lastingly that policy restraint can be eased," he added.

Ashima Goyal, professor, Indira Gandhi Institute of Development Research, said RBI needs to use tools to align the call rate with the repo rate. This includes extending money market timings and developing market microstructure to enable banks to lend to each other.

“Just as the tightening cycle started by withdrawing liquidity to ensure the repo rate would rise above the reverse repo, now after 6 months of tight banking liquidity, and as expected real rates rise, measures to ensure the WACR largely stays at the repo rate are required," said Goyal.

“These would also bring down short rates and are part of the natural development of the liquidity adjustment framework that supports inflation targeting."

Economists see the central bank holding off on rate cuts till the second half of 2024. 

The MPC marginally lowered its inflation forecasts for the fourth quarter of FY24 as well as for all of FY25. 

Overall, the panel expects inflation to drop to 4.5% in 2024-25 from 5.4% in 2023-24. It has pegged GDP growth for 2024-25 at 7%, in line with the government’s estimate.

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Published: 22 Feb 2024, 08:03 PM IST
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