MPC members caution against over-tightening

Mumbai: Members of the Reserve Bank of India’s monetary policy committee (MPC) have cautioned against excessive tightening of interest rates, warning that it could lead to an unexpectedly sharp slowdown in economic growth and may prompt a sudden reversal in rate action.

“In the current situation of high inflation, monetary policy does not have the luxury of responding to these growth headwinds. In fact, it is almost axiomatic that monetary action can cool inflation only by suppressing demand. However, policymakers must be vigilant against overshooting the terminal policy rate, thereby slowing the economy to a greater extent than what is needed to glide inflation to the target,” said MPC member Jayant Varma.

Earlier this month, RBI kept the repo rate unexpectedly steady at 6.5% following six consecutive rate hikes since May last year.

On this, MPC member Ashima Goyal said, “There is no logic for overshooting policy rates and then cutting in a country such as India where the largest impact of the interest rate is on growth, the relation between expected rupee depreciation and interest rates is weak, many tools are available to reduce excess volatility of the exchange rate and have been successfully used, the current account deficit has reduced, and its financing is no longer an issue.”

Following the April MPC decision, several economists expect the rate-setting panel to start cutting interest rates in the second half of the fiscal year as inflation stays below 6% and global growth slows down.

However, MPC members, according to the minutes, emphatically state that the rate hike cycle is far from over, given the uncertainty around the inflation trajectory.

RBI executive director and MPC member Rajiv Ranjan said, “...this is a ‘wait and watch’ pause. It is neither a ‘premature’ pause nor a ‘permanent’ one. Not ‘premature’ because we have already increased the policy rate by 250 bps in about a year with front-loaded rate action of about 190 bps during the first five months. Not ‘permanent’ as any durable decline in inflation towards the target of 4% is still distant.”

RBI deputy governor Michael Patra also believes that inflation continues to be the biggest risk to the economic outlook.

According to governor Shaktikanta Das, the overall situation remains dynamic and fast evolving. “Clarity on monsoon will be available in the coming months. Milk prices may remain firm in the lean summer season on tight demand-supply balance and high fodder costs. The rising uncertainty in international crude oil prices also warrants close monitoring,” Das said.