High prices are the cause of slowing demand in India, and aligning inflation with the central bank’s 4% target is key to ensuring sustained economic growth, setting committee members said rates in the minutes of the December meeting.
“At this critical juncture, the policy priority must be to restore the balance between inflation and growth,” Reserve Bank of India Governor Shaktikanta Das said in the minutes of the latest committee meeting. Monetary Policy (MPC) published Friday.
Lower inflation will increase household disposable income and purchasing power, and this approach will support consumption and investment demand, Das said.
The RBI kept its key interest rate unchanged earlier this month but cut banks’ cash reserve ratio for the first time in more than four years, easing monetary conditions as economic growth slows.
India’s GDP growth rate unexpectedly fell to 5.4% in the July-September quarter, its slowest pace in seven quarters, while inflation remains well above 4%.
“The monetary policy stance is open to support growth, but it must wait for inflation to ebb on a sustainable basis, otherwise the uneven progress made so far in disinflation will dissipate,” the governor wrote Deputy Michael Patra.
Saugata Bhattacharya, external member, said growth and inflation had worsened and the risk of making a “policy mistake” was higher now than in October’s policy.
Four of the six members of the monetary policy committee voted to maintain the repurchase rate, but two external members – Nagesh Kumar and Ram Singh – voted for a reduction of 25 basis points.
“I think a rate cut would help revive economic growth without worsening the inflationary situation, which may ease with the seasonal correction in prices,” said Mr. Kumar, who voted for a rate cut in a second consecutive meeting.
Both Kumar and Singh pointed to the limited impact of monetary policy on food inflation, as well as the sharp slowdown in growth, as reasons to change policy.
They are also in favor of lowering rates to avoid the risk of a sharp appreciation of the currency if India does not normalize its interest rates while most other global central banks have already engaged in a easing cycle.
“When the correlation between food prices and core inflation is weak at best and the share of commodities contributing to inflation has declined, maintaining high interest rates to keep headline inflation closer “The target imposes growth costs that are disproportionate to the gains on the price front,” Mr Singh said.
