MPC minutes: Maintenance of restrictive policy for long will lead to growth sacrifice in FY26, says Jayanth Varma

RBI MPC minutes: Maintenance of restrictive policy for long will lead to growth sacrifice in FY26, says member Jayanth Varma

Maintenance of a restrictive policy for unwarrantedly long will lead to growth sacrifice in 2025-26, said MPC member Jayanth Varma going by the minutes of the June 5-7 monetary policy review, which was released on June 21.

"It now appears that the maintenance of restrictive policy for unwarrantedly long will lead to a growth sacrifice in 2025-26 as well," Varma said.

Varma, while noting that 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%,  said is an unacceptably high growth sacrifice.

Varma said so considering that headline inflation is projected to be only about 0.5% above target, and core inflation is extremely benign.

"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," Varma said.

Varma voted to reduce the repo rate by 25 basis points, and to change the stance to neutral in the policy while the majority decided to keep the repo rate unchanged for the eights consecutive policy review.

Apart from Varma, Ashima Goyal too had voted for a rate cut in the last MPC minutes.

The rate-setting panel, which has kept the rates on hold for over a year now, said it wants to see signs of retail inflation easing to a sustainable level before tweaking the rates. The repo rate, at which the RBI lends short-term funds to banks, stands at 6. 5 percent.

Inflation has been easing but not to the central bank's desired levels yet. India's retail inflation stayed largely unchanged at 4.83 percent in April against a 10-month low of 4.85 percent in March. In April, CPI inflation fell to 4.83 per cent and in May, the CPI fell further to  4.75 percent.

Time and again, the central bank has made it clear that after bringing down inflation to the target band of 2-6 percent, the next aim is to align with the 4 percent target, that too on a sustainable basis.

The central bank had, assuming a normal monsoon, earlier projected the CPI inflation for 2024-25 at 4.5 percent with the first quarter at 4.9 percent, the second quarter at 3.8 percent, the third quarter at 4.6 percent and the fourth quarter at 4.5 percent.

Interest rates in the banking system have been hovering on the higher end following the RBI's policy cues. Banks are struggling with a slower deposit growth far less than the  credit growth, creating an asset-liability mismatch.

Earlier, most economists who participated in a Moneycontrol poll, had predicted that the central bank will retain status quo in key rates on June 7 as inflation was still beyond the 4 percent target.