Two members of the Reserve Bank's six-member Monetary Policy Committee (MPC) - Jayant R Varma and Ashima Goyal - who voted against the 25 basis points (bps) rate hike, stated that any further increase will be detrimental to the country's growth, the minutes of the meeting held on February 6-8 showed. Varma and Goyal also voted against the MPC's decision to keep the stance as withdrawal of accommodation, highlighting the differences in opinion in the policy panel. In the February policy, in a majority 4:2 decision, the MPC raised the repo rate to 25 basis points to 6.5 per cent in its fight against inflation. However, taking a different stand, RBI Governor Shaktikanta Das said, "we need to give time for our past policy actions to work through the system. It would be premature to pause, lest we are caught off-guard and need to do a catching up later." “I believe that the 25 basis point rate hike approved by the majority of the MPC is not warranted in the current context of diminished inflationary expectations and heightened growth concerns. I therefore vote against this resolution," Varma said. According to Goyal, excessive front-loading of rate hikes carries the risk of over-shooting that is best avoided for compelling reasons in the Indian context. She said raising real policy rates to reduce demand has a stronger effect on growth than it does on inflation. Since there are more lags in the monetary transmission in India, over-shooting can have persistent deleterious effects here, including instability. Varma said in the second-half of 2021-22, monetary policy was complacent about inflation, which was the reason for unacceptably high inflation in 2022-23. After a peak of 7.8 per cent in April 2022, the CPI inflation moved below the upper tolerance level of 6 per cent during November-December 2022, "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,” Varma said. On the monetary policy stance, Varma opined, “I believe that a repo rate of 6.5 per cent very likely overshoots the policy rate needed to achieve price stability, and further tightening is not desirable. I therefore vote against this resolution also.” In the current fiscal, the RBI has increased repo rate by 250 bps starting May 2022. Goyal said the macroeconomic stability improves most rapidly if real interest rates are kept smoothly below growth rates and counter external shocks. “It is better to give time for possible softening of both inflation and growth and effects of past monetary tightening to play out,” she said while voting against the 25 bps rate hike. The minutes showed that Goyal favoured a shift to a neutral stance. Das, who heads the MPC, said there are 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 to ensure a decisive and durable moderation in inflation towards the target of 4 per cent over the medium term, while being mindful of growth," he said. “Hence, further calibrated monetary policy action is necessary in the current MPC meeting to keep inflation expectations anchored and break the persistence of core inflation while containing second round effects,” Das said while favouring a 25 bps rate hike. RBI Deputy Governor Michael Patra said although inflation seems to have peaked, it remains high and is the biggest threat to the macroeconomic outlook. “On a pragmatic basis, it is important to at least contain inflation within the tolerance band in 2023-24 as the first milestone to be passed in aligning inflation with the target,” Patra said. He voted for increasing the policy rate by 25 bps while continuing to withdraw accommodation.
