The Reserve Bank of India's Monetary Policy Committee voted unanimously at its meeting earlier this month to leave the repo rate unchanged at a record-low of 4 percent for the 10th consecutive time. The RBI chose to support recovery in growth over countering inflation.
However, there has been some disagreement in recent months on the RBI's stance and on the reverse repo rate.
External member Jayanth Varma, a professor at the Indian Institute of Management, Ahmedabad, was not in favour of retaining an accommodative stance and a reverse repo rate of 3.35 percent, according to the minutes of the MPC's February 8-10 meeting released on February 24.
"I have in the past expressed my reservations about the abnormal width of the policy corridor, but with all money market rates having moved close to the upper end of the corridor, the persistence with a low reverse repo rate has now become a somewhat harmless fetishism, and I will therefore not dwell on it," Varma was cited as saying.
However, Varma stuck to his guns on the policy stance, saying a change to neutral from accommodative is "long overdue."
'Modest rise'
Perhaps more revealing was his assertion that while real interest rates need to remain low, they must become "mildly positive" in FY23. And though this can be largely achieved through a fall in inflation, "there would be a need for a modest rise in nominal interest rates."
While only Varma knows what a "modest" rise in interest rates would constitute, economists from outside the RBI have been predicting rate increases for some time now, the quantum of which can certainly not be termed 'modest.'
Nomura, for instance, said the RBI's FY23 inflation is a gross underestimate (RBI: 4.5 percent, Nomura: 5.8 percent) and that the repo rate will be hiked by 100 basis points in the 12 months starting April.
Varma was not alone in hinting that the repo rate may soon need to be increased.
Ashima Goyal, another external member of the MPC and emeritus professor at Indira Gandhi Institute of Development Research in Mumbai, was noted in the minutes as saying that the markets had priced in "steeply rising policy rates."
According to Goyal, this seemed to be an overreaction to the expected rise in US Fed rates and of government borrowing requirements. The liquidity adjustments already made, along with the expected fall in inflation, implied "a sharp rise in Indian policy rates is unlikely to be required," she said.
Again, only Goyal knows what rise in policy rates she had in mind. The mention of a rise in itself is noteworthy, although the increase may not be as much as the markets expect.
RBI executive director Mridul Saggar was, perhaps, some distance behind. Noting that the global interest rate cycle is "decidedly changing," Saggar warned that emerging market economies such as India should "brace for tighter financial conditions ahead even if domestic monetary policy stays accommodative."
Saggar has spoken in the past of the need to increase the repo rate. In December 2021, he had said that monetary policy could have acted to pre-emptively douse inflation fires if there was certainty about the broad-based and durable revival of growth.
The overall tone of the minutes of the February meeting was dovish, helped in part by the necessary caveats added by the aforementioned members of the committee and dire warnings by others (RBI deputy governor Michael Patra: "So central banks have a choice: either accept higher inflation for some time or be prepared to be accountable for destroying demand").
Reading too much into the minutes is a risk. However, certain members seem to be warming up to the idea that a policy rate lift-off is not far away. Of course, whether they have enough votes to shift the committee's decision, when the time comes, is another matter.
