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High interest rates hurt growth: RBI monetary policy member Verma supports rate cuts

Professor Jayant R Verma, one of the six members of the Monetary Policy Committee of the Reserve Bank of India (RBI), voted to reduce the repo rate by 25 basis points in the policy meeting held earlier this month.

Noting that economic growth in 2024-25 is projected to be more than half a percentage point slower than 2023-24, Verma said it was a reminder that higher-interest rates involve growth sacrifices.

“Monetary policy should attempt to minimize this sacrifice while ensuring that inflation (a) remains within the band and (b) moves toward the target,” he argued, according to minutes of the meeting released on Friday.

“Despite the rise in crude oil prices, the inflation outlook remains benign, and I am confident that real interest rates of 1-1.5 per cent will be enough to take inflation to the target of 4 per cent,” Verma said. ,

Therefore the current real policy rate of 2 per cent (based on projected inflation for 2024-25) is excessive, he stressed.

Inflation remains the main concern for members of the Monetary Policy Committee of the Reserve Bank of India before it goes ahead and loosens its stance on key interest rates.

According to the minutes of the latest monetary policy meeting released on Friday, there were several mentions of uncertainties around inflation.

According to the minutes of the RBI monetary policy meeting, pressure in food prices is disrupting the ongoing deflation process in India, and creating challenges in ultimately bringing the inflation trajectory back to the 4 per cent target.

Unexpected supply side shocks from adverse climate events and their impact on agricultural production, as well as geopolitical tensions and spillovers into trade and commodity markets, have added uncertainties to the outlook, the minutes said.

The RBI generally holds six bi-monthly meetings in a financial year, where it deliberates on interest rates, money supply, inflation outlook and various macroeconomic indicators. The other five meetings are scheduled for June 5-7, 2024; August 6-8, 2024; October 7-9, 2024; December 4-6, 2024; and February 5-7, 2025.

RBI is currently focusing on bringing down inflation to the target of 4 per cent on a sustainable basis.

On expected lines, RBI kept the policy repo rate unchanged at 6.50 per cent for the seventh consecutive time. Repo rate is the interest rate at which RBI lends to other banks.

Barring the latest disruptions, the RBI has raised the repo rate by a cumulative 250 basis points to 6.5 per cent from May 2022 in the fight against inflation. Raising interest rates is a monetary policy tool that generally helps to suppress demand in the economy, thereby helping to decline the inflation rate.

Coming back to the RBI policy statement, RBI Governor Shaktikanta Das said India remains the fastest growing major economy in the world, supported by an uptick in the investment cycle and revival in the manufacturing sector. The service sector is continuously growing at a strong pace.

According to the latest World Economic Outlook of the International Monetary Fund, India will remain the fastest growing economy among major economies in 2024.

Dr Rajeev Ranjan, another member, said food inflation remains hostage to vegetable prices due to little recovery in prices during the winter season, which may persist due to the possibility of above normal temperatures during the summer.

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

“The relatively shallow and short-lived winter trough is paving the way for rising prices as summer sets in, with temperatures forecast to rise through May 2024,” Patra said.

Also read: Food prices a challenge to eventual reduction in inflation: RBI policy minutes

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