The two external members of the monetary policy committee (MPC), who voted against both MPC resolutions at its meeting held during February 6-8, had cautioned that more tightening will further reduce demand and result in unacceptably low growth in FY24, show the minutes of the latest MPC meeting released by the Reserve Bank of India on Wednesday.

Ashima Goyal (Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai) and Jayanth R Varma (Professor, IIM Ahmedabad) voted against the resolutions — to increase the policy repo rate by 25 basis points from 6.25 per cent to 6.50 per cent and to remain focused on withdrawal of accommodation. The other four MPC members supported the aforementioned resolutions.

Read also: RBI ups repo rate by 25 bps; FY24 GDP seen at 6.4%

Overshooting risk

Goyal cautioned that excessive front-loading of rate hikes carries the risk of overshooting that is best avoided for compelling reasons in the Indian context.

Read more: Editorial. MPC’s caution on inflation understandable

“First, raising real policy rates to reduce demand has a stronger effect on growth than it does on inflation. Second, since there are more lags in monetary transmission in India, overshooting can have persistent deleterious effects here, including instability. Third, macroeconomic stability improves most rapidly if real interest rates are kept smoothly below growth rates and counter external shocks,” said Goyal, who voted for a pause.

She was also in favour of a shift to neutral stance which is consistent with response in any direction as required depending on the impact of global and domestic factors on expected inflation.

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Varma underscored that in the second half of 2021-22, monetary policy was complacent about inflation, and “we are paying the price for that in terms of unacceptably high inflation in 2022-23.”

“In the second half of 2022-23, monetary policy has, in my view, become complacent about growth, and I fervently hope that we do not pay the price for this in terms of unacceptably low growth in 2023-24. I believe that the 25-bps rate hike approved by the majority of the MPC is not warranted in the current context of diminished inflationary expectations and heightened growth concerns....,” the IIM-A professor said.

More read: RBI still in inflation-battle mode

Turning to the stance, Varma noted that a repo rate of 6.50 per cent very likely overshoots the policy rate needed to achieve price stability and further tightening is not desirable.

Headwinds plenty

RBI Governor Shaktikanta Das observed that overall, there is considerable uncertainty at this stage on the evolving inflation trajectory due to ongoing geopolitical tensions, global financial market volatility, rising non-oil commodity prices, volatile crude oil prices and also weather-related events.

“We must, therefore, remain unwavering in our commitment to bring down inflation... Hence, further calibrated monetary policy action is necessary in the current MPC meeting...,” he said.

Das also noted that the pace of rate hike should be tapered in view of two considerations — time needs to be given for past policy actions to work through the system; and it would be premature to pause, “lest we are caught off-guard and need to do a catching up later.”