Two out of the six members of the Monetary Policy Committee (MPC) opposed the decision to hike policy repo by 25 basis points to 6.50 per cent announced by the Reserve Bank of India on February 8 and termed the further tightening “not desirable”, as per minutes of the meeting released on Wednesday.
Opposing the majority decision of rate hike, MPC member Jayanth R Verma said, “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.”
Verma also voted against the resolution of further tightening the monetary policy. “I believe that a repo rate of 6.50 per cent very likely overshoots the policy rate needed to achieve price stability, and further tightening is not desirable,” said Verma, also a professor at the Indian Institute of Management, Ahmedabad.
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Another member of MPC who opposed the rate hike decision is Ashima Goyal, emeritus professor, the Indira Gandhi Institute of Development Research. “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.
Goyal listed three points to buttress her argument. First, raising real policy rates to reduce demand has a stronger effect on growth than it does on inflation. Second, since there are more lags in monetary transmission in India, over-shooting can have persistent deleterious effects. Third, macroeconomic stability improves most rapidly if real interest rates are kept smoothly below growth rates and counter external shocks.
The 41st meeting of the MPC was held during 6-8 February under the chairmanship of RBI Governor Shaktikanta Das. By a majority, the MPC decided to hike policy repo rate by 25 basis points to 6.50 per cent. The RBI has cumulatively increased the repo rate by 250 basis points since May 2022.
Apart from RBI Governor Das, Shashanka Bhide, honorary senior advisor at National Council of Applied Economic Research; Rajiv Ranjan, RBI’s executive director and Michael Debabrata Patra, RBI Deputy Governor, voted to increase the policy repo rate by 25 bps.
“Although it seems to have peaked, inflation remains high and, in my view, it is the biggest threat to the macroeconomic outlook,” Patra said while supporting the rate hike decision.
In his statement during the MPC meeting, RBI Governor said, “we should taper the pace of rate hike in view of two considerations: (i) we need to give time for our past policy actions to work through the system; and (ii) it would be premature to pause, lest we are caught off-guard and need to do a catching up later.”