RBI Governor cautions against ‘early moves’ in policy, maintains status quo on repo rate

RBI MPC minutes: The Reserve Bank of India Governor Shaktikanta Das strongly supported the decision to leave the policy repo rate unchanged at 6.5 per cent and pointed out that any argument for easing now might well be misleading. The RBI Governor made these statements during the central bank's Monetary Policy Committee meeting held between August 6-8. Das, in the minutes of the meeting released by the RBI on Thursday, reiterated that the present policy rate is "broadly balanced" and in sync with the RBI's objective of managing inflation while supporting economic growth. While two members were pitching for a rate cut, the committee maintained a status quo on the benchmark interest rate for the ninth consecutive time.

This comes in the backdrop of sticky high food inflation which the RBI feels needs to be monitored constantly to avoid passing on to the other sectors of the economy. To underpin this, Das pointed out that the calibrated increase in the repo rate by 250 basis points since May 2022 and the transition towards a ‘withdrawal of easing’ stressed a controlled disinflation since mid-2020.

The setting of a forecast was done at the figure 4.5 per cent for headline inflation in 2024-25, Das felt that currently the policy rate was still far from being an extremely expensive sacrifice of domestic economic activity. He also stressed that one had to be wary of making policy decisions by relying on theoretical policy variables such as the equilibrium natural rate of interest which is “unobservable and time-varying”.

’Any comfort on policy easing on the account of high real rates can therefore be deceptive,’ Das said though inflation is clearly on a gradual but highly uneven downtrend and sustaining it at 4 per cent remains a long term goal.

During the meeting External MPC members Ashima Goyal and Jayanth R. Varma voted in favour of a 25 basis points cut in repo rate. A rate cut, said Goyal, has been essential to reduce risks and return to getting back on the fundamentals that paved the policy success in the last three years. Varma stood his ground on the grounds that though undoubtedly it is necessary to maintain restrictive monetary policy for a few more quarter, it would still premature to move towards cutting the repo rate by more than 50 basis point in the near future.

However, the larger part of the Mumbai-based MPC consisting of Das, Deputy Governor Michael Debabrata Patra, Executive Director Rajiv Ranjan and member Shashanka Bhide stuck to status quo with regard to the rate as well state the stance. Patra elaborated on the growing gap between ‘headline’ and ‘food’ inflation and stated that any action that negates the RBI commitment to aligning inflation to its target may harm the potential of the Indian economy.

This, he noted, had been necessitated by such factors as the uncertain picture for food inflation including its pass through to the core and global conditions. He was keen on maintaining the ‘status-quo’ until such issues as these get more clarity.

The next MPC meeting would be on the October 7-9, 2024 where the situation would be reviewed in order to take appropriate monetary policy steps.