The Reserve Bank of India (RBI) released the minutes of the Monetary Policy Committee (MPC) meeting held from August 6 to 8, 2024, revealing significant concerns raised by external members Ashima Goyal and Jayanth R. Varma. As this was their final meeting before their terms end in October, Goyal and Varma strongly advocated for a more cautious monetary policy, specifically calling for a reduction in the policy repo rate.

The MPC, chaired by RBI Governor Shaktikanta Das, faced the challenge of balancing inflationary pressures, particularly in food prices, with the need to support economic growth. Most MPC members opted to maintain the policy repo rate at 6.50%, reaffirming their commitment to controlling inflation while fostering growth. Governor Das defended this decision, emphasising the need for price stability to ensure sustainable growth.

Deputy Governor Michael Debabrata Patra also supported the majority’s view, stressing the risks of persistent food inflation and its impact on inflation expectations and consumer confidence.

However, Goyal and Varma dissented, arguing that the majority needed to be more optimistic about India’s growth prospects and sufficiently attentive to potential economic downturn risks.

Ashima Goyal: A Call for Forward-Looking Policy

Goyal, a respected economist and professor at the Indira Gandhi Institute of Development Research (IGIDR), criticised the MPC’s reliance on current inflation trends to guide policy decisions. She argued that monetary policy should be more forward-looking, anticipating future variables rather than reacting solely to current conditions.

“Monetary policy needs to act well in time,” Goyal asserted. She advocated for a 25 basis points reduction in the repo rate, pointing out that inflation is trending downwards and that maintaining high real interest rates could stifle growth.

Goyal also highlighted the global context, noting that other central banks have begun easing their monetary stances in response to slowing growth. She cautioned against India falling behind in adjusting its policy to support economic expansion, especially as inflation appears to moderate.

Jayanth R. Varma: Warning Against Complacency

Varma, a professor of finance at the Indian Institute of Management, Ahmedabad (IIM-A), expressed deep concerns about the MPC’s approach, which he described as overly complacent.

Varma argued, “The majority of the MPC is too sanguine about growth in ensuing quarters… It is one of the tasks of monetary policy to ensure that this opportunity is not squandered by excessively high real interest rates.” He emphasized that India’s growth potential is much higher than the projections, and the current policy stance risks undermining this potential.

Varma criticised the reliance on high real interest rates, which he believes are unnecessarily restrictive and could hinder India’s economic progress. He called for an immediate 25 basis points cut in the repo rate, along with a shift to a neutral stance, to prevent the economy from slipping into a lower growth trajectory.

Shashanka Bhide: Alignment with the Majority

Dr Shashanka Bhide, a senior advisor at the National Council of Applied Economic Research (NCAER), aligned with the majority in the MPC. He supported the decision to keep the policy repo rate unchanged at 6.50%, reflecting a cautious optimism about India’s growth prospects. Bhide acknowledged the resilience in domestic economic activity but emphasised the need to focus on inflation control given the persistent food inflation and its potential spillover effects on broader price levels.