Restrictive policy will lead to growth sacrifice in 2025-26: MPC member Jayanth Varma

Reserve Bank of India’s monetary policy committee member Jayanth Varma has expressed concern about the growth sacrifice in 2024-25 induced by restrictive monetary policy.

“It now appears that the maintenance of restrictive policy for unwarrantedly long will lead to a growth sacrifice in 2025-26 as well,” Varma says in a statement as per minutes of the June MPC meeting released today.

“Professional forecasters surveyed by the RBI are projecting growth both in 2025-26 and in 2024-25 to be lower than in 2023-24 by more than 0.75%, and lower than the potential growth rate (of say 8%) by more than 1%. This is an unacceptably high growth sacrifice considering that headline inflation is projected to be only about 0.5% above target, and core inflation is extremely benign,” Varma says.

Varma voted to reduce the repo rate by 25 basis points and to change the stance to neutral.

“As I have stated in the last several meetings, the current real policy rate of around 2% (based on projected inflation) is well above the level needed to glide inflation to its target,” he says.

Ashima Goyal, another external member of MPC, voted for a 25 basis points cut to the repo rate and a change in the stance to neutral.

“Headline inflation has been around 5% since January this year while core inflation has been below 4% since December 2023. Volatile commodity prices, El Nino and heat waves have not been able to reverse the approach to target. The headline inflation projection of 4.5% for 2024-25 gives an average real repo rate of 2% implying that the real repo rate will be above neutral for too long if the repo rate stays unchanged,” says Goyal.

“Falling inflation has raised real repo above unity. This will reduce real growth rate with a lag. Expected growth is around 7% in 2024-25 below the 8% achieved in 2023-24. Status quoism is praised as being cautious. But if doing nothing distorts real variables it aggravates shocks instead of smoothing them and raises risk,” she adds.

India's retail inflation dipped to a 12-month low of 4.75% in May, down slightly from April's 4.83%. Inflation has remained below 5% for three consecutive months since March. The decline in headline inflation rate was primarily due to a drop of 3.83% in the fuel and light category in May. In contrast, the inflation rate for food and beverages remained unchanged at 7.87% compared to April.

Earlier in June, RBI governor Shaktikanta Das said inflation is expected to fall below 4% in the second quarter of 2024-25 but that may not lead to a rate cut because inflation is again expected to rise in the succeeding quarter to 4.7%. The last mile of our journey towards 4% inflation target is pretty sticky, the RBI governor said during the post monetary policy press conference. “When we have confidence that inflation will stick to 4% and not go up, then we will act on further monetary policy action,” Das said.