Will tight monetary policy curb growth? MPC members remain divided

Mumbai: For long, concerns over inflation have dominated proceedings of the central bank's rate-setting panel. Now, growth is finding a place at the table.

Keeping real interest rates high for too long will hurt growth, two members of the Reserve Bank of India's monetary policy committee (MPC) said, before the six-member panel voted to keep rates and policy stance unchanged a fortnight ago. The minutes of the 5-7 June meeting were released on Friday.

Jayant Varma, who has been demanding a rate cut in the past several meetings, warned that keeping the policy restrictive for too long will hurt growth over the next two years. While MPC revised the growth projection for FY25 upwards to 7.2% from 7% earlier, it is lower than the actual FY24 growth of 8%.

Growth sacrifice?

“Professional forecasters surveyed by the RBI are projecting growth both in 2025-26 and in 2024-25 to be lower than in 2023-24 by more than 0.75%, and lower than the potential growth rate (of say 8%) by more than 1%. This is an unacceptably high growth sacrifice considering that headline inflation is projected to be only about 0.5% above target, and core inflation is extremely benign,” said Varma.

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“Expected growth is around 7% in 2024-25 below the 8% achieved in 2023-24. Status quoism is praised as being cautious. But if doing nothing distorts real variables, it aggravates shocks instead of smoothing them and raises risk,” Goyal added.

Both Varma and Goyal had voted for cutting interest rate and changing monetary policy stance at the June meeting, the eighth time the committee has kept the repo rate unchanged at 6.5%.

Sanguine about growth

On the contrary, other MPC members were sanguine about growth prospects. Governor Shaktikanta Das said economic growth is strong enough to create space for monetary policy to focus on inflation, which persists above its 4% target.

“The growth-inflation balance is moving favourably in line with our projections," Das said. “With persistently high food inflation, it would be in order to continue with the disinflationary policy stance that we have adopted. Any hasty action in a different direction will cause more harm than good,” he said.

Also read | When food inflation became main course on MPC menu

India's GDP grew at a blistering 8.2% in FY24, ably supported by January-March quarter growth of 7.8%. The push to GDP growth came from several key sectors including manufacturing, construction, mining and services sectors.

‘Keep vigil’

Michael Patra, RBI deputy governor in charge of monetary policy and other MPC members, backed intensifying monetary policy vigil over food inflation amid the current economic growth.

"With output in broad balance in relation to its potential, monetary policy can remain neutral to growth at this juncture and stay focused on aligning inflation to the target. That objective remains incomplete, which can undermine medium-term growth prospects," said Patra.

Rajiv Ranjan, RBI executive director and MPC member said, “Let me emphasise - The inertia of inaction should not drive us to action. Rather, the driving force should be the macroeconomic setting of growth and inflation. Clearly, the favourable growth-inflation balance and the outlook is pointing towards status quo,” said Ranjan.

Also read | Jayanth Varma, MPC's sole dissenter, on inflation, interest rate and MSP

“As the aggregate output projections for 2024-25 reflect strong GDP growth, keeping the monetary policy focus on achieving the inflation target on a durable basis is appropriate at this juncture,” said Shashank Bhide, MPC member.

The moot point of disagreement between the doves and status quoists is the perception on anticipated growth conditions, said Vivek Kumar, an economist a QuantEco Research. "As per the doves, India’s output gap will slip into negative territory in FY25 and FY26 if monetary policy is not finetuned as per the ongoing moderation in inflation. From the perspective of the status quoists, India’s growth prospects appear promising amidst the likelihood of a surplus monsoon outturn, improvement in global trade prospects, superior quality of fiscal consolidation, sound corporate balance sheets, and improvement in productivity," Kumar said.