Having come this far in the economic cycle, India cannot risk another bout of inflation, Shaktikanta Das, Governor of the Reserve Bank of India and a member of the Monetary Policy Committee (MPC), said on its stance to hold rates while the external member Nagesh Kumar—the only one of the six-member MPC—voted for a 0.25 percent rate cut, saying it could help revive demand and spur private investment, according to MPC minutes released by the RBI on Wednesday.
Stating that several industrialized and emerging economies have started cutting interest rates to revive economic growth, he said India risks currency appreciation if it does not follow the normalization process. “The rupee is already appreciating in real terms and further appreciation would hurt the competitiveness of Indian products,” Dr Kumar said.
“Given that inflationary expectations have been successfully fixed and industrial demand in both domestic and export markets is slowing, a cut in interest rates could help revive demand and help stimulate private investment,” noted d- r Kumar.
However, Governor Das said, “The best approach now would be to remain flexible and wait for more evidence of sustained inflation alignment.
“Monetary policy can support sustainable growth only by maintaining price stability. Taking all these factors into account, I vote to change the stance from withdrawal to neutral, while keeping the repo rate unchanged at 6.50%,” he said in his statement.
Deputy Governor and MPC member Michael D Patra was of the view that the path of inflation is reconfiguring towards the target in the main forecast, according to his gauge of inflation four quarters ahead.
“This trajectory is likely to hit a hump in the coming months as forecast, but this is largely due to unfavorable fundamentals and one-off shocks in prices of vegetables, edible oils and grams. The expectation is that the effects of these shocks should dissipate by December as supply conditions improve,” he said.
“It is therefore possible that monetary policy will review these peaks while closely monitoring their development until they are removed.” The overall inflationary environment is improving. Inflation expectations of households and businesses have eased and remain fixed,” he added as he voted to pause.
External member Saugata Bhattacharya said that given the current heightened uncertainty, both global and domestic, a very cautious and calibrated approach to easing was needed and the cost of a “policy mistake” was likely to be high.
“The multi-dimensional implications of cutting repo rates now and in the future need careful assessment,” he said.
Stating that food inflation was an important source of uncertainty, which increased in August from the previous month, external member Ram Singh said that going forward, moderation in core inflation could be volatile in the near term due to adverse base effects.
“Food inflation is expected to moderate later this financial year due to strong kharif and rabi sowing in addition to adequate buffer stocks. Adverse weather events, however, remain uninsured risks for food inflation,” Prof Singh said.
“Given all these factors, there is reason to remain vigilant on food inflation and at the same time support growth,” he added.
According to insider Rajiv Ranjan, there is enough evidence to give confidence that the MPC is on the right track.
“Our cautious and calibrated approach paid off. Monetary policy works well to contain inflation. Going forward, there is greater confidence that inflation will align with the target, unless it is significantly disrupted by weather events and worsening geopolitical risks,” he said.
“We also need to keep a close eye on global commodity prices, especially food and metal prices, which have shown some signs of firming,” Dr Ranjan added.
Published – October 23, 2024, 8:17 PM IST
