Food shocks, fiscal consolidation, high real rates open scope
for cut in policy rates: External members
Our Bureau
Mumbai: Temporary food shocks, fiscal consolidation and high real interest rates have cre- ited the scope for reduction in policy interest
rates, said external members of the Monetary
Policy Committee, but those from the Reserve
Bank of India (RBI) believe that the markets
are running ahead of policy makers.
Prof. J.R. Varma, who voted for are duction in
the repo rate by a quarter point and a shift in
monetary stance to neutral from withdrawal
of accommodation, said the economy is not
overheating and the MPC needs to send a signal it is living up to its dual mandate on in flati on and growth.
‘Inflation is projected to average 4.5% in 2024-
25, and, therefore, the current policy rate of
6.5% translates into a real rate of 2%,” Varma
wrote in the minutes of the meeting of the last
policy review. “The time has come for the MPC
to send a clear signal that it takes its dual man
date of inflation and growth seriously, and that
it would not maintainareal in terestrate that is
significantly more than what is needed to achieveitstarget.”
But the members from the central bank led by
the governor are a lot more cautious given that
be haviour of inflation in the past have caught
policy makers on the wrongfoot.
“At this juncture, monetary policy must remain vigilant anid not assume that our job on
the inflation front is over,” said Governor
Shaktikanta Das.
“We must remain committed to successfully
navigating the ‘last mile’ of disinflation which
can be sticky. As markets are front-running
central banks in anticipation of policy pivots,
any premature move may undermine the successachievedsofar”
The MPC in its last meetingkept the policy repo rate, the rate at which RBI lends to banks,
unchanged at6.5percent,and monetary stance
remained focused on withdrawal of accommodation. But Varma differed with the rest and voted for a cut and a change in stance
While food prices, which are driven by sea sonal factors, have been the main component of
the Indian Consumer Price Index worrying po
licy makers, there appears to be a shift in the
way it works.
TRANSITORY IMPACT
“The experience of the past year suggests
commodity price shocks may now be short
lived and may not raise inflation persistently,” said Ashima Goyal, an external member.
“Then it would not be necessary to keep rates high just because supply shocks are expected in the future. But we could wait to test
this for some more time.”
But those in the central bank believe past
history suggests that bringing it down to the
target in the last phase has been more challenging than capping it from as teeper climb.
“"Successfully managing the final descent
of inflation is the most challenging part of
the journey and the history of past 100 inflation episodes teaches us that inflation
shock, in general, tends to be persistent,” said Rajiv Ranjan, executive director, RBIL
“"Markets are currently running ahead of
policy makers worldwide including India.
Any change in policy direction is going to
have a multiplier effect.”
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