With every successive meeting, the monetary policy committee's stance to remain focused on 'withdrawal of accommodation' is becoming more and more disconnected from reality, according to MPC member Jayanth R. Varma.
Based on the forecast inflation of 5.1% for 2023-24, the real repo rate is now almost 1.5%, Varma said as per the minutes of the MPC's June meeting.
The real short-term rate could well be above that level since in recent weeks, many money market rates have often drifted towards the Marginal Standing Facility (MSF) rate of 6.75%, he said.
"In other words, monetary policy is now dangerously close to levels at which it can inflict significant damage to the economy. Despite this, the majority of the MPC wishes to remain focused on withdrawal of accommodation whatever that phrase might mean. I have therefore seriously considered dissenting on this part of the resolution, but after careful thought I have decided to confine myself to expressing reservations on it," Verma said.
The main reason for not dissenting is that after two successive meetings at which the repo rate has been left unchanged, this stance now appears more vestigial than a serious statement of intent, he added.
The Reserve Bank of India's MPC maintained the status quo on the key policy repo rate at 6.5% in its second policy statement for FY24. The MPC's policy stance remains focussed on 'withdrawal of accommodation' to ensure that inflation progressively aligns with the target while supporting growth, RBI governor Shaktikanta Das had said after the rate-setting panel's June meeting.
Das voted to continue with the stance of 'withdrawal of accommodation', citing surplus liquidity in the banking system. "We have a way to go to align headline inflation with 4.0 per cent target on a durable basis and ensure that the overall financial conditions are in sync with the monetary policy stance," Das said.
Varma, who voted for keeping the repo rate unchanged in the June meeting, said the current level of the repo rate is high enough to keep inflation below the upper tolerance band on a sustained basis and also glide it towards the middle of the band.
However, there are significant risks to both inflation and growth, and the process of bringing inflation under control is still very much a work in progress, he said, adding it would be premature to declare victory at this point in time based on the inflation prints of just a couple of months.
"In this context, I am not at all comfortable with the self congratulatory tone of the statement in the MPC Monetary Policy Statement that the MPC took note of the moderation in CPI headline inflation in March-April into the tolerance band, in line with projections, reflecting the combined impact of monetary tightening and supply augmenting measures," Varma said.
According to MPC member Rajiv Ranjan, continuity in the stance with a clear-cut objective of aligning inflation to the 4% target is important. "Any premature change in stance may be hasty and could undo the hard work done so far. It may also tamper with the transmission process that is currently underway. Recent actions of some advanced economies reverting back to rate hikes after a pause need to be kept in mind," Ranjan said.