High-interest rates sacrifice growth: RBI monetary policy member Jayanth R Varma favoured rate cut

Professor Jayanth R Varma, one of the six members of the Reserve Bank of India's (RBI) monetary policy committee, voted to reduce the repo rate by 25 basis points in the policy meeting held earlier this month.

Noting that that economic growth in 2024-25 is projected to slow by over half a percent relative to 2023-24, Varma said it was a reminder that the high-interest rates entail a growth sacrifice.

"Monetary policy should try to reduce this sacrifice while ensuring that inflation (a) remains within the band and (b) glides towards the target," he argued, as per the Minutes of the meeting, released on Friday.

"Despite an uptick in crude oil prices, the outlook for inflation continues to be benign, and I remain convinced that a real interest rate of 1-1.5 per cent would be sufficient to glide inflation to the target of 4 per cent," Varma said.

The current real policy rate of 2 per cent (based on projected inflation for 2024-25) is therefore excessive, he asserted.

Inflation continues to remain the main concern for the Reserve Bank of India's monetary policy committee members before it goes ahead and loosens its stance on key interest rates.

As per the Minutes of the latest monetary policy meeting released on Friday, there have been several mentions of uncertainties around inflation.

Pressure in food prices has been interrupting the ongoing disinflation process in India, and posing challenges for the final descent of the inflation trajectory to the 4 per cent target, as per minutes of RBI's monetary policy meeting.

Unpredictable supply-side shocks from adverse climate events and their impact on agricultural production as well as geo-political tensions and spillovers to trade and commodity markets add uncertainties to the outlook, said the minutes.

The RBI typically conducts six bimonthly meetings in a financial year, where it deliberates interest rates, money supply, inflation outlook, and various macroeconomic indicators. The other five meetings are scheduled for June 5-7, 2024; August 6-8, 2024; October 7-9, 2024; December 4-6, 2024; and February 5-7, 2025.

The RBI is currently focused on bringing down the inflation to 4 per cent target on a durable basis.

Along anticipated lines, RBI kept the policy repo rate unchanged at 6.50 per cent, the seventh time in a row. The repo rate is the rate of interest at which the RBI lends to other banks.

Barring the latest pauses, the RBI raised the repo rate by 250 basis points cumulatively to 6.5 per cent since May 2022 in the fight against inflation. 

Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.

Coming back to the RBI policy minutes, RBI Governor Shaktikanta Das said India continues to be the fastest-growing major economy in the world, supported by an upturn in the investment cycle and revival in manufacturing. The services sector continues to grow at a strong pace.

India is set to remain the fastest-growing among major economies in 2024, according to the International Monetary Fund's latest World Economic Outlook.

Dr. Rajiv Ranjan, another member, noted that food inflation remained a hostage to vegetable prices due to shallower winter season price correction, which could linger due to the likely above-normal temperatures during the summer.

According to Dr. Michael Debabrata Patra, recent inflation prints and high-frequency data on salient food prices indicate that food inflation risks remain elevated.

"A relatively shallow and short-lived winter trough is giving way to a build-up of price momentum as summer sets in, with forecasts of rising temperatures up to May 2024," Patra noted.