Economy

Published: June 23, 2023
Updated: June 23, 2023

RBI Members Clash Over Rate Hikes Amid Growth Concerns

The latest minutes from India's monetary policy committee (MPC) meeting reveal a growing divergence among its members regarding the future trajectory of rate hikes. While some external members argue that further tightening could impede the economic recovery, the Reserve Bank of India (RBI) emphasises the need to curb inflationary pressures.

Diverging Views on Rate Hikes:

External member Jayant Varma warns that monetary policy is approaching levels that could harm the economy. He cautions against inflicting significant damage and urges a cautious approach. Similarly, Ashima Goyal, another external member, emphasises0 the importance of not raising the real repo rate too high, as it may negatively affect the economic cycle. They advocate for aligning the nominal repo rate with expected inflation rather than keeping it elevated for an extended period.

Internal Members' Focus on Inflation:

In contrast, all three internal members of the RBI highlight the upside risks to inflation. They maintain that the pause in rate hikes during June was a specific policy decision and future actions should be guided by evolving macroeconomic data. Deputy Governor Michael Patra warns of potential upward pressure on prices due to supply-demand mismatches, particularly in the latter half of 2023-24. He stresses the need for monetary policy to remain vigilant and ensure the economy recovers from shocks without lasting scars.

Inflation Figures and RBI's Perspective:

Annual retail inflation in India dropped to a more than two-year low of 4.25% in May, within the RBI's target range of 2%-6% for the third consecutive month. However, RBI Governor Das emphasises that the battle against inflation is not yet over. He urges a forward-looking assessment of the inflation-growth outlook and a readiness to act if necessary. The RBI reinstates the medium-term target of 4% for the MPC, beyond the 2-6% band.

Emphasising Inflation Target:

Rajiv Ranjan, an executive director at the RBI, calls for a renewed focus on the 4% inflation target. He suggests differentiating between the target and the tolerance for deviations from it. Clarity on macroeconomic fronts leads him to believe that the time is right to align inflation with the 4% goal.

The minutes of the MPC meeting shed light on the conflicting viewpoints among its members regarding future rate hikes in India. While external members express concerns about potential damage to the economy, internal members emphasize the need to address inflationary pressures and potential supply-demand mismatches. The RBI acknowledges the recent decline in inflation but remains committed to the ongoing fight against inflation. As India's economy navigates the path to recovery, balancing growth concerns and price stability will remain a crucial challenge for the monetary policy committee.