Over 50 basis points repo rate cut needed: MPC member Jayanth Varma

Reserve Bank of India’s monetary policy committee member Jayanth R. Varma says it is depressing that India's projected growth rates for 2024-25 and 2025-26 are significantly lower than the potential growth rate of the Indian economy, and also well below what is needed at the current stage of the country's demographic transition to meet the aspirations of the new entrants into the workforce.

The MPC forecasts India's gross domestic product (GDP) to grow 7.2% in FY25.

However, Varma believes multiple policy measures during the last few years such as digitalisation, tax reforms, and a step up in infrastructure investment have boosted the potential growth rate of the Indian economy to at least 8%.

“A confluence of demographic and economic factors present India with a rare opportunity to accelerate its growth over the next decade or more. It is one of the tasks of monetary policy to ensure that this opportunity is not squandered by excessively high real interest rates,” Varma said as per the minutes of the monetary policy committee meeting held from August 6-8.

The majority of the MPC, according to Varma, is too sanguine about growth in ensuing quarters. Data from various RBI surveys show multiple early warning signals that growth may be already slowing down, he notes. “Expectations of robust growth depend heavily on an expectation that private capital investment will pick up soon. However, we have been hoping for this revival for many quarters now, and hope is not a strategy,” Varma cautions.

“For the last several meetings, I have been expressing concerns about the unacceptable growth sacrifice induced by a monetary policy that is excessively restrictive. The majority of the MPC however do not share this concern, perhaps because they think that the Indian economy is already growing at close to its potential growth rate. I think that such a view reflects (a) an unwarranted pessimism about the growth potential of the economy and (b) an overly sanguine expectation about growth in ensuing quarters. I disagree with both prongs of this assessment,” says Varma.

The RBI's projections show inflation bouncing up and down from quarter to quarter, but the trend line is clearly downward, and the projected inflation for the first quarter of 2025-26 is 4.4% says Varma. “On a forward looking basis, the current repo rate of 6.5% translates into a real rate of 2.1%. This is well above what is needed to drive inflation to the target of 4%. It is true that disinflation has been protracted, and therefore restrictive monetary policy has to be maintained for a few more quarters. But a real interest rate of 1.5% is sufficiently restrictive in this environment,” he says.

“This means that a reduction of over 50 basis points in the repo rate is needed within a short span of time, but it makes sense to move cautiously in this direction. I therefore vote to reduce the repo rate by 25 basis points, and to change the stance to neutral,” Varma says.