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April 23, 2024

India Divided: MPC Members Varma, Goyal Disagree on Timing of Rate Cuts to Fuel Growth

India’s monetary policy committee (MPC) is facing a crucial decision regarding interest rates as the nation aims to propel its economy towards its potential growth. Interviews with two external members, Ashima Goyal and Jayanth Varma, reveal a division within the committee regarding the timing of rate cuts.

Goyal, one of the three external members on the six-member MPC, emphasizes the need for rate cuts to boost growth. She stresses that India is in a “catch-up growth phase,” where increasing growth is essential for job creation, stimulating investment, and fostering economic development. Goyal suggests that as long as inflation remains within the tolerance band and approaches the target, the economy has room to grow at higher rates.

However, despite acknowledging the need for higher growth, Goyal advocates for maintaining stability due to robust economic growth, currently estimated at 7.6% for 2023/24, and uncertainties on the inflation front. The MPC recently kept the lending rate steady at 6.5% for the seventh consecutive meeting, indicating a preference for stability. Goyal believes that stability is crucial, especially given the frequent supply-side shocks that could impact the inflation trajectory.

On the other hand, Jayanth Varma, another external MPC member, stands in favor of rate cuts. He argues that cutting interest rates is essential to prevent rising real rates when growth is slowing down. Varma emphasizes that high real rates could impede private sector capital investment, which is vital for economic growth, especially in an environment of fiscal consolidation.

Despite concerns about maintaining a contractionary monetary policy to keep the real neutral rate above 1%, Goyal is cautious about repeating the overheated capex cycle experienced in the 2000s. She highlights the importance of a slow and sustainable investment cycle to avoid excessive borrowing and defaults.

Varma, however, believes that a growth slowdown is already anticipated, with projected growth for 2024/25 at 7%. He emphasizes the need to balance growth and inflation, suggesting that monetary policy should be calibrated to achieve the inflation target with minimal sacrifice to growth.

The disagreement within the MPC reflects the complexity of India’s economic landscape. While there is consensus on the need for growth, differing opinions emerge on the appropriate monetary policy stance. The challenge lies in finding the right balance between stimulating growth and maintaining economic stability amidst inflationary pressures and uncertainties.

As India navigates its path towards economic recovery and sustainable growth, the decisions made by the MPC will play a crucial role in shaping the country’s future trajectory. Whether rate cuts will be implemented to fuel growth or stability will be prioritized to mitigate inflation risks remains a contentious issue that requires careful consideration.

Jhumpa Lahiri

Jhumpa Lahiri

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