Pause could prove costly, said Shaktikanta Das; growth fragile, held MPC dissenter Varma

Reserve Bank of India (RBI) Governor Shaktikanta Das. File.
| Photo Credit: PTI

 The Reserve Bank of India could ill afford to opt for a “premature pause in monetary policy action” as it would prove costly at a time when there was stickiness in core inflation, Governor Shaktikanta Das stressed at the Monetary Policy Committee’s meeting earlier this month, the minutes show. On the other hand, fellow MPC member Jayanth Varma, who voted against raising interest rates yet again, asserted that “economic growth is now extremely fragile and definitely not robust enough to withstand excessive monetary tightening”.  

“A premature pause in monetary policy action would be a costly policy error at this juncture. Given the uncertain outlook, it may engender a situation where we may find ourselves striving to do a catch-up through stronger policy actions in the subsequent meetings to ward-off accentuated inflationary pressures,” Mr. Das had said in voting to raise the repo rate.

Arguing that the balance of risks had shifted decisively away from inflation to growth both globally and domestically, Mr.. Varma, however, said he expected that over the next few quarters the real economy would experience the full brunt of the front-loaded tightening by central banks across the world.

“I believe that the 35 basis point rate hike approved by the majority of the MPC is not warranted in this context of reduced inflationary pressures and heightened growth concerns,” Mr. Varma noted, the minutes released on Wednesday show.

Also voting against the majority-backed policy stance of remaining ‘focussed on withdrawal of accommodation’, he contended that given monetary policy impacted the economy with a lag, front loading of monetary policy action would pose an unwarranted risk to economic growth.

“Because monetary policy acts with lags, it may take 3-4 quarters for the policy rate to be transmitted to the real economy, and the peak effect may take as long as 5-6 quarters,” Mr. Varma said, adding that the MPC had raised the repo rate by 225 basis points in about eight months. “Much of the impact of this large front-loaded monetary policy action is yet to be felt in the real economy… I believe that 6.25% itself very likely overshoots the repo rate needed to achieve price stability, and poses an unwarranted risk to economic growth. “

“The majority of the MPC is saying that they intend to tighten even more by withdrawing accommodation. This stance would be even more damaging to the fragile growth outlook and I therefore vote against this resolution also,” he further said.

MPC member Ashima Goyal, who had joined Mr. Varma in voting against the policy stance, contended that, “withdrawal of accommodation was alright as long as the large liquidity surpluses and excessive rate cuts of pandemic times persisted. But durable liquidity seems to have contracted so much that the LAF system has not been able to compensate for liquidity shocks during the last two months”.

Urging a shift to a ‘neutral’ policy stance she noted that “the call money rate has exceeded the repo rate for much of the time. It is time to move to a neutral stance, where movement can be data-based in any required direction, as new information affects forward projections”.