Mumbai: The rate-setting panel of India’s central bank remained divided over the timing of monetary policy action aimed at reviving India’s economic growth, even as they expect price rise to cool off, show minutes of the 6 December meeting, released on Friday.
All three Reserve Bank of India (RBI) members in the six-member monetary policy committee (MPC) insisted that maintaining policy status quo was essential to bring down India’s inflation closer to the regulator’s 4% medium-term target to support faster growth.
These three, and one external member, voted to keep the repo rate, its key policy rate, on hold.
The other two external members—Nagesh Kumar and Ram Singh—voted for a 25 basis points reduction, pointing to slowing economic growth and dim expectations of an impact on food inflation from a repo rate hold. A basis point is one-hundredth of a percentage point.
Kumar and Singh believe lower interest rates are necessary to boost India’s economic growth, which they expect will eventually contain inflationary pressures.
The MPC earlier this month decided to keep the repo rate unchanged at 6.5% for the 11th successive time, even as India’s gross domestic product (GDP) in the July-September period grew at its slowest pace in seven quarters and inflation softened in November.
India’s GDP growth rate fell unexpectedly to 5.4% in the financial second quarter. Retail inflation in October was the highest in 14 months at 6.2%, but dropped to 5.5% in November.
“Lower inflation will enhance disposable income with households and increase their purchasing power. Such an approach would support consumption and investment demand. Without addressing this core issue, it would not be possible to foster sustainable growth,” said Shaktikanta Das in the meeting.
Das stepped down as RBI governor following this meeting. Revenue secretary Sanjay Malhotra took over from him as chief of India’s central bank on 11 December.
While the MPC kept its key interest rate unchanged, it cut banks’ cash reserve ratio (CRR) for the first time in over four years, effectively easing monetary conditions and potential for increased liquidity as economic growth slowed.
Among the MPC members, RBI deputy governor Michael Patra sounded more hawkish, expecting inflationary pressures to remain high. He noted that household inflation expectations for the next year and professional forecasters’ expectations have seen an uptick.
“There are early signs of second order effects or spillovers of high primary food prices—following the surge in prices of edible oils, inflation in respect of processed food prices is starting to see an uptick,” said Patra.
“In this environment, the hardening of input costs across goods and services and their flow into selling prices need to be watched carefully. If allowed to run unchecked, it can further undermine the prospects of the real economy, especially industry and exports,” he added.
External member Ram Singh made a case against including food inflation while deciding on interest rates. He argued that the rate-setting panel should look at targeting price stability within a range instead of aiming to bring consumer price index-based (CPI) inflation to a point target of 4%.
Singh also said the current situation of slower growth without material changes in the prospects for inflation necessitates a policy pivot.
“When the correlation between food prices and core inflation is weak at best and the share of items contributing to inflation has come down, keeping interest rates elevated to keep overall inflation closer to the target imposes growth costs that are disproportionate to the gains on the prices front,” said Singh.
Nagesh Kumar, the other external member in the MPC, said monetary policy had limited impact on bringing down food inflation, which is largely driven by supply-side shocks driving up vegetable prices. He argued that the slowdown in growth was due to decreased consumption and investments, which requires a pivot in policy action.
“The slowdown of the manufacturing sector can be addressed by bringing down the cost of capital, which may stimulate investments as well as consumer demand. Hence, a rate cut could help, among other measures,” Kumar said. “Expanding the manufacturing sector could also help in containing inflationary pressures by enhancing the supply capacity.”
Saugata Bhattacharya, the only external member who voted for status quo, cautioned that the risk of making a “policy error” was higher now than during the MPC’s meeting in October.
Rajeev Rajan, RBI executive director in the monetary policy committee, pointed to the outcome of the rabi, or winter crop, season as a critical factor, saying it would provide clarity on food prices.
