By Swati Bhat
MUMBAI (Reuters) – India’s economy needs an interest rate cut to sustain high growth, two external members of the central bank’s rate panel said, arguing that food price shocks so far have not added to broader inflationary pressures.
Ashima Goyal and Jayanth Varma, who are members on the Reserve Bank of India’s monetary policy committee (MPC), both voted to cut the benchmark rate at the last policy meeting, dissenting against the four who voted to keep it unchanged at 6.5%.
Meanwhile, Shashanka Bhide, a third external MPC member who voted for a status quo, acknowledged that the growth outlook is an “important consideration” in setting policy.
The views of the three members show increasing concern among policymakers about momentum in Asia’s third-largest economy, even as inflation holds stubbornly above the RBI’s 4% target.
Monetary policy typically acts with lags of three to five quarters, which means the higher rates would impact growth next year and not the current year, said Varma, who has voted for a rate cut for two straight meetings.
“For much of 2023/24, I have been more worried about 2024/25 than about 2023/24. Now that we are in 2024/25, I am more worried about 2025/26. The robust catch up growth that we saw in 2023/24 does little to alleviate these worries,” he told Reuters in an interview.
India’s economy grew 8.2% in the fiscal year ended March 2024. The RBI sees growth slowing to 7.2% in the 2025 fiscal year.
Food price shocks, which have kept headline inflation above the central bank’s 4% target, are not having a sustainable effect on inflation or inflation expectations, said Goyal, said in the minutes published on Friday.
“We have waited for one year to watch the impact of these (food price) shocks, now it is time to move on,” she said.
Even with a 25 basis point rate cut, “monetary policy would remain disinflationary towards bringing inflation credibly to the target,” Goyal added.
Bhide said he prefers to wait until inflation is aligned with the target but agreed that high real interest rates are not conducive to growth.
“The spill over from high food inflation to the headline may not be immediate but it does have indirect effects including on the wage rates, subsidies and on sectors where food products are raw materials,” he told Reuters in an interview.
“Lower real rates combined with lower inflation rates are important,” Bhide said.
Still, the three RBI members continue to argue that policy needs to remain tight, echoing guidance from Governor Shaktikanta Das.
“Resilient growth creates space for monetary policy to focus unambiguously on inflation which remains well above the 4% target,” Das has said.
“Any hasty action in a different direction will cause more harm than good.”
