Monetary Policy Committee Grapples with Divergent Views on Interest Rate Cut

RBI rate cuts:  Interviews with two external members of India's monetary policy committee (MPC) reveal a division over timing of interest rate cuts necessary to unleash country's economic potential.

Ashima Goyal, one of external MPC members, emphasized need for higher growth rates to stimulate job creation and investment. Despite robust economic growth estimated at 7.6 per cent for 2023/24, Goyal vocated for maintaining stability amidst uncertainties in inflation, suggesting a status quo on rates.

However, Jayanth Varma, anor external MPC member, consistently voted for rate cuts in nominal terms to counter rising real rates and facilitate private sector capital investment. Varma expressed concerns that high real rates could hinder growth, emphasizing importance of calibrating monetary policy to achieve inflation target with minimal growth sacrifice.

While Goyal acknowledged potential for maintaining contractionary monetary policy with a rate cut, she remained cautious about avoiding a repeat of overheated capex cycle experienced in 2000s. On or hand, Varma argued that a slowdown is anticipated, given projected growth for 2024/25, and emphasized need to balance growth-inflation tre-off effectively.

MPC's recent decision to keep lending rate stey at 6.5 per cent for seventh consecutive meeting reflects ongoing debate within committee. market expects rate cuts only in early 2025, with differing perspectives on appropriate timing and magnitude of such measures to support India's economic trajectory.

With Reuters Inputs