A majority of the six member monetary policy committee (MPC) voted to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 per cent and also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth in terms of their stance.
But external members Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai and Jayanth R. Varma, Professor, Indian Institute of Management, Ahmedabad have dissented for the second consecutive time on both rates and stance. They both voted for a 25 bps rate cut and change in stance to neutral. Interestingly J R Varma has been voting for a rate cut since December 2023 and for a change in stance since August 2022 in every successive meetings.
Though their official reasons for their latest vote will be out only when the minutes of the meetings ae released in another two weeks, in the minutes of the June meeting, Ashima Goyal had said that 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. 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 2023-242. Status quoism is praised as being cautious. But if doing nothing distorts real variables it aggravates shocks instead of smoothing them and raises risk.
While Professor Varma had said in the June minutes that It now appears that the maintenance of restrictive policy for unwarrantedly long will lead to a growth sacrifice in 2025-26 as well. 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.