Dissenting outgoing members say a restrictive monetary policy could beat the cost of growth

The common argument of the two dissidents in the monetary policy committee, external members – Prof. Ashima Goyal and Prof. JR Varma is that a restrictive monetary policy Keeping monetary policy rates high could result in growth in it economyaccording to the minutes of the August 8 monetary policy meeting released by the Reserve Bank of India.

“Excessive monetary tightening can trigger a shift to a lower growth path, so that the growth sacrifice is large,” said Goyal, professor emeritus at the Indira Gandhi Institute of Development Research. “Those who advocate a stronger increase in trend prices should, over time, realise that as aggregate growth increases, inflation “Real gains tend to be lost.”

Goyal along with JR Varma of the Indian Institute of Management voted in favour of a 25 basis point cut. repo rate and a shift in stance to “neutral from” withdrawal of accommodation.” The term of both dissenting members ends this month. voted for a rate cut and a shift in stance for the second consecutive time. “I have been expressing concerns about the unacceptable sacrifice of growth induced by a monetary policy that is excessively restrictive,” Varma said. “However, the majority of the MPC does not share this concern.” The Reserve Bank has projected the economy to grow by 7.2 per cent for the 2024-25 fiscal year.

However, Governor Shakti Kanta Das said the current policy rate is broadly balanced and avoids a costly sacrifice of domestic economic activity. Moreover, those who voted for a status quo on policy rates at 6.5 per cent fear that persistence of food inflation could derail the benefits of disinflation in headline CPI. While July CPI inflation eased to below the 3.5 per cent target, it is expected to rise further in the December quarter and FY 2024-25 inflation is projected at 4.5 per cent.

Internal member Michael Patra will explain his decision to vote for the status quo. “Monetary policy is an instrument to modulate aggregate volatility.” demandFood price shocks can originate outside the scope of monetary policy and manifest themselves initially in supply imbalances, but when their effects remain in the inflation formation process, they can spread through second-order effects and become generalized, to which monetary policy cannot be insensitive.”

The constant rise in prices always and everywhere is a reflection of excessive demand chasing too little supply, even if it is a supply deficit that starts the price spiral. “It is the purview of monetary policy to adjust demand conditions to the state of supply because this build-up of price pressures threatens the outlook for both inflation and growth,” Patra said. But Goyal underlined the need to downplay the impact of food inflation by highlighting flaws in measuring inflation in India. “As Indian inflation is poorly measured and can be over- or under-estimated, excessive precision with respect to a target is unproductive,” he said.