India’s potential for economic growth calls for interest rate cuts, but interviews with two external members of the South Asian nation’s monetary policy committee (MPC) highlight divisions on the appropriate timing for such measures.
Ashima Goyal, one of three external MPC members, emphasized the importance of higher growth rates to generate employment opportunities, boost investments and propel the economy forward. Goyal acknowledged that inflation remained within the acceptable band and approached target levels. However, considering robust current economic growth around 7.6% for 2023/24 and multiple uncertainties regarding inflationary pressures, maintaining stability through a status quo on rates seemed preferable.
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The recent MPC meeting resulted in no change to lending rates at 6.5%, marking seven consecutive meetings without alterations after an accumulated increase of 250 basis points between May 2022 and February 2023. Market expectations suggest rate cuts may only occur in early 2025, with Morgan Stanley ruling out any cuts in this fiscal year.
Governor Shaktikanta Das cautioned against losing sight of possible inflationary risks despite India’s successful disinflation process when reviewing minutes released from that meeting. Amongst committee members Jayanth Varma was the sole proponent for a rate cut over two consecutive meetings.
Varma expressed his concerns about rising real interest rates during a period when economic growth is slowing down. He believes high real rates could impede private sector capital investment crucial during fiscal consolidation efforts.
While Goyal recognized that lower rates could still result in a real neutral rate above 1% and maintain contractionary monetary policy; she remains cautious based on experiences from previous decades where overheated capital expenditure cycles led to excessive borrowing and increased defaults. Goyal stressed the importance of slow yet sustainable cycles currently underway.
Varma, on the other hand, argues that a growth slowdown is already anticipated given the projected growth rate of 7% for 2024/25. He acknowledges the existence of a trade-off between inflation and growth and emphasizes the need to calibrate monetary policy to achieve inflation targets with minimal sacrifice to economic expansion.
The differing opinions within India’s MPC reflect deliberations on how best to balance stimulating economic growth while ensuring price stability. As uncertainties persist, future decisions will shape India’s monetary policy path in its pursuit of sustained and balanced economic growth.