Split Perspectives: RBI MPC's Take on Growth and Inflation

The Reserve Bank of India’s (RBI) Monetary Policy Committee’s (MPC) recently held meeting, culminated in a decision that underscored differing perspectives among its members on the appropriate path forward. The external members voted for a rate cut the remaining voted for a rate hold. In more detail, the minutes of the meeting revealed a growing divergence in views and increasing concerns around both upside risks to inflation and downside risks to economic growth.

External member, Dr. Ashima Goyal emerged as a proponent of a rate cut, presenting a well-articulated argument grounded in recent economic trends. She noted that headline inflation had stabilised around 5% since January 2024, while core inflation remained below 4% since December 2023. In her view, falling inflation has raised real repo rate above unity. We remind that the the neutral real policy rate is 1% in India given conditions of high unemployment and ongoing transition to higher productivity employment. Goyal also highlighted the diminishing likelihood of significant supply shocks, citing improved global conditions and a promising monsoon forecast. Her recommendation for a 25 basis points cut in the repo rate and change of stance to neutral aimed to align monetary policy with the disinflationary trend without compromising the objective of price stability. Echoing similar concerns, Prof. Jayanth R. Varma emphasised the potential growth sacrifice induced by the current restrictive monetary policy. He pointed out that professional forecasters expected lower growth in both Fy25 and FY26. 

Meanwhile the other four members of the MPC advocated caution, persistent vigilance and the need for a balancing act. Dr. Rajiv Ranjan offered a more cautious perspective, despite acknowledging robust growth and a favourable economic outlook. He underscored the importance of maintaining caution, consistency, and credibility in monetary policy decisions. Ranjan stressed that any premature policy changes could destabilise inflation expectations and disrupt the disinflation process. Meanwhile, Dr Patra argued that the repetitive nature of food price shocks required continued monetary policy vigilance to prevent spillovers to other inflation components. This thought was reiterated by Dr Bhide, as well. 

RBI governor, Shaktikanta Das aligned with the cautious camp, emphasising the importance of maintaining a disinflationary stance. He noted that while growth was robust, inflation remained above the target level, driven primarily by food prices. Das highlighted the success of the RBI’s calibrated tightening since 2022-23, which had moderated inflation with minimal growth sacrifice. Are added that any hasty action could disrupt the hard-won gains in inflation control.

The latest MPC meeting underscores the intricate trade-offs faced by India’s monetary policymakers. The differing views reflect a broader debate on the optimal balance between supporting economic growth and ensuring inflation control. Dr. Goyal and Prof. Varma’s advocacy for a rate cut highlights concerns about potential growth slowdown if restrictive monetary policies persist. Conversely, the caution expressed by the others underscores the risks of premature policy easing. We anticipate the RBI to hold rates until food inflation is firmly under control. A rate cut is expected in Q4-2024. It is worth noting though that more than one member of the MPC, including the governor, have now stated that the rate cut is entirely contingent on domestic indicators, and while the MPC will track the US Federal Reserve’s moves, the MPC decision is not dependent on monetary policy moves in the US or other advanced nations.