RBI Monetary Policy Member Varma Thinks High Rates Hurt Growth

(CTN News) – The Reserve Bank of India (RBI)’s monetary policy committee, which includes Jayanth R Varma, voted to reduce the repo rate by 25 basis points earlier this month.

As a result of high interest rates, Varma said the economy is projected to grow slower in 2024-25 than in 2023-24.

He argued in the minutes of the meeting that monetary policy should reduce this sacrifice while keeping inflation in the band and gliding towards the target.

“I still think a real interest rate of 1-1.5 percent would be enough to glide inflation to 4 percent, despite an uptick in crude oil prices,” Varma said.

He says the real policy rate is too high (based on projected inflation for 2024-25).

The Reserve Bank of India’s monetary policy committee continues to worry about inflation before loosening interest rates.

In the minutes of the latest monetary policy meeting released on Friday, there were several mentions of inflation uncertainty.

Indian disinflation has been disrupted by food price pressure, posing challenges for the final descent of the inflation trajectory to the 4% target, according to RBI minutes.

There’s uncertainty in the outlook because of supply-side shocks caused by adverse climate events, as well as geo-political tensions and spillovers to trade and commodity markets.

Each financial year, the RBI holds six bimonthly meetings to discuss interest rates, the money supply, the inflation outlook, and other macroeconomic indicators. June 5-7, 2024; August 6-8, 2024; October 7-9, 2024; December 4-6, 2024; and February 5-7, 2025 are the other five meetings.

Currently, the RBI’s goal is to keep inflation below 4 percent.

As expected, the RBI kept the policy repo rate at 6.50 percent. In other words, it’s the RBI’s lending rate.

RBI’s repo rate has been raised by 250 basis points cumulatively to 6.5 per cent since May 2022, barring the latest pauses. Inflation typically declines when interest rates are raised, since they suppress demand in the economy.

In the RBI policy minutes, Governor Shaktikanta Das said India remains the fastest-growing major economy in the world, thanks to an upturn in investment cycles and a revival in manufacturing. Services grow fast.

The IMF’s latest World Economic Outlook predicts India will be the fastest-growing major economy in 2024.

Another member, Dr. Rajiv Ranjan, noted that food inflation remained tied to vegetable prices due to shallow winter price corrections. This could linger due to above-normal summer temperatures.

According to Dr. Michael Debabrata Patra, recent inflation prints and high-frequency data indicate that food inflation risks remain high.

Patra predicted that prices would increase as summer approaches and temperatures rise through May 2024.

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