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 the timing of interest rate cuts necessary to unleash the country's economic potential.

Ashima Goyal, one of the external MPC members, emphasized the 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 advocated for maintaining stability amidst uncertainties in inflation, suggesting a status quo on rates.

However, Jayanth Varma, another 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 the importance of calibrating monetary policy to achieve the inflation target with minimal growth sacrifice.

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

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

With Reuters Inputs