MPC minutes: Jayant Varma voted against 35 bps rate hike saying growth 'extremely fragile'

The MPC hiked the repo rate, the rate at which the central bank lends short-term funds to banks, by 35 bps to fight inflation that has remained over 6 percent for the most part of the year in its meeting on December 5-7.

Explaining his stance, Varma said growth concerns have become more troubling in recent months both globally and domestically.

Noting that financial markets are pricing in the likelihood of a recession in several advanced economies, Varma said during the pandemic, exports and government spending were the two growth engines that counteracted the headwinds confronting the Indian economy.

Of these, the global slowdown has already led to the export growth engine grinding to a halt, Varma said, adding fiscal constraints limit the ability of government spending to hold up the economy on its own.

Further, private investment is unlikely to be able to pick up the slack, the MPC member said.

“Anecdotal evidence suggests that concerns about future growth prospects are deterring capital investment even by companies that have reached more than 80% capacity utilization. That leaves only private consumption which has remained buoyant, but it remains to be seen how much of this is due to pent-up demand which could dissipate over the coming months,” Varma said.

In this context, the growth scene remains extremely fragile, Varma said.

Varma, yet again, made a case for a pause in rate hikes citing the lag in monetary policy typically by 3-4 quarters for the policy rate to be transmitted to the real economy.

The MPC has raised the repo rate by 225 basis points in about eight months to fight inflation. Three consecutive quarters of retaining inflation above 6 percent level were deemed a failure for the panel as it is mandated to keep inflation in the 2 percent to 6 percent band.

“Much of the impact of this large front-loaded monetary policy action is yet to be felt in the real economy. For these reasons, I believe that 6.25% itself very likely overshoots the repo rate needed to achieve price stability, and poses an unwarranted risk to economic growth,” said Varma.

Varma said the majority view of the MPC to tighten policy even more by withdrawing accommodation will be even more damaging to the fragile growth outlook.

Varma's views are in sharp contrast with remaining members at the MPC who argued that continued rate actions are warranted in the face of high retail inflation. Varma, on the other hand, is batting for growth at this juncture.

Core inflation concerns

Members expressed concerns about persistently high core inflation, the RBI minutes showed.

"The persistence of core inflation at the upper limit of the tolerance band of the inflation target is of particular concern," said Shashanka Bhide.

This view was echoed by deputy governor Michael Patra. "Core inflation remains unyielding and diffused, with a rising price momentum as it tests the upper tolerance band on its own, warranting resolute monetary policy resolve to quell it," Patra said.

Concerns pertaining to high inflation were echoed by RBI Governor Das too who said an early pause in rate hikes will be a policy error. “I am of the view that a premature pause in monetary policy action would be a costly policy error at this juncture,” Das said.

While the worst of inflation is behind us, it remains above the upper tolerance level. "Core inflation is exhibiting persistence around 6 percent for the past few months. Hence, there is no room for complacency and the battle against inflation is not over. This necessitates a constant vigil on prices," said Das.

At the last meeting, the MPC decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

India's headline retail inflation rate slumped to an 11-month low of 5.88 percent in November from 6.77 percent in the previous month, data released on December 12 by the ministry of statistics and programme implementation showed.

At 5.88 percent, the latest Consumer Price Index (CPI) inflation print is well below the consensus estimate. As per a Moneycontrol poll, inflation was seen falling to 6.4 percent. The fall in inflation in November follows a similar drop in October, allowing it to fall below the 6 percent upper bound of the Reserve Bank of India's (RBI) 2-6 percent tolerance band for the first time in 2022.

As for the medium-term target of 4 percent, CPI inflation has exceeded it for 38 months in a row.