The Reserve Bank of India’s top two officials differed in their approach in the monetary policy announced on April 4, according to minutes released by the RBI on Thursday. While Reserve Bank Governor Shaktikanta Das argued for focussing on economic growth with a Repo rate cut, Deputy Govenor Viral Acharya cautioned on another rate cut in the wake of high inflation excluding food and fuel.
The 6-member Monetary Policy Committee (MPC) decided to reduce the policy repo rate by 25 basis points to 6 per cent in a 4-2 majority decision.
According to Das, investment demand is losing traction and a deceleration in exports may further impact investment activity. With the inflation outlook looking benign and headline inflation expected to remain below target in the current year, it becomes necessary to address the challenges to sustained growth of the Indian economy, he said. “Hence, I vote for reducing the policy repo rate by 25 basis points. I would like to state here that there is a need to consider interest rate adjustments, not necessarily in the conventional way of 25 bps or multiples thereof,” Das said.
However, Acharya said inflation excluding food and fuel remains uncomfortably close to 5.5 per cent, i.e., at elevated levels as through most of the past twelve months. This is confirmed also in rising staff costs in the formal sector, he said.
“Notwithstanding signs of weakness in growth evinced in high frequency economic indicators, I am inclined to wait for some more time for incoming data to resolve several important uncertainties that will shape the Indian economy in the coming one or two years,” Acharya said. The counter-factual exercises suggest that 6.25 per cent policy repo rate is just “right” for achieving headline inflation target of 4 per cent on a durable basis in the medium term, Acharya said.
Moving on to economic activity, high frequency indicators suggest a further loss of pace in growth, Das said. Private consumption has been weakening as reflected in deceleration in the growth of passenger car sales and domestic air passenger traffic, weak performance of consumer durables and non-durables, and continuing contraction in non-oil non-gold imports. “Investment activity has also decelerated due to contraction in production of capital goods in January and imports of capital goods in February,” Das said.
Acharya said continuing oil price rise or fiscal impulses or seasonal uptick in volatile vegetable prices would likely require some tightening down the road. “Only a substantial collapse in global growth, which seems unlikely at present given proactive responses of central banks in advanced economies and China, would justify a rate cut at this point. Hence, I am erring on the side of caution, choosing to be patient, rather than supporting another rate cut on the back of MPC’s February decision to cut the rate,” Acharya said.
According to the RBI Governor, on the supply side, industrial growth has weakened as reflected in deceleration in the growth of index of industrial production (IIP) for January and the growth of core industries for February remained sluggish.