High rates food for thought, but inflation on Governor Das’ plate

The chorus at India’s interest rate-setting panel appears to have grown louder with two outgoing external members — Ashima Goyal and J R Varma — underscoring the risks a ‘higher-for-longer’ approach poses for broader economic growth, the latest minutes of the meeting of the Monetary Policy Committee (MPC) review showed.

“Excess monetary tightening can trigger a switch to a lower growth path so that the growth sacrifice is large” Goyal, professor Emeritus at the Indira Gandhi Institute of Development Research, said. “Those proposing a higher trend price rise should, in time, become aware that as aggregate inflation rises real gains tend to be lost.”

Goyal and Indian Institute of Management’s J R Varma voted for a 25 basis point cut in repo rate and a change of stance to ” neutral from “withdrawal of accommodation”.

The term for both the dissenting members ends this month. They voted for a rate cut and a change in stance for the second consecutive time.”I have been expressing concerns about the unacceptable growth sacrifice induced by a monetary policy that is excessively restrictive,” Varma said . “The majority of the MPC, however, do not share this concern”
But internal member, Governor Shaktikanta Das, said that the present policy repo rate is broadly in balance and avoids costly sacrifice of domestic economic activity.

Besides those who voted for a status quo in policy rates at 6.5% believe the persistence in food inflation could derail the gains from disinflation. Even as CPI inflation for July eased to below the target 3.5%, it is expected to rise further in the December quarter and the FY’2024-25 inflation is projected at 4.5%.

Internal member Michael Patra explained his decision to vote for a status quo.

“Monetary policy is an instrument for modulating aggregate demand. Food price shocks may originate outside the realm of monetary policy and initially manifest themselves in supply mismatches, but when their effects stay in the inflation formation process, they can propagate through second order effects and get generalised to which monetary policy cannot be insensitive,” Patra said.

Persistently rising prices are always and everywhere a reflection of too much demand chasing too less supply even if it is a supply shortfall that starts the price spiral, he said.

“It is the remit of monetary policy to adjust demand conditions to the state of supply because this accumulation of price pressures threatens the outlook for both inflation and growth,” Patra said.

But Goyal underscored the need to downplay the impact of food inflation by highlighting the flaws in inflation measurement.
“Since Indian inflation is not well measured, and could be over or under-estimated, too much precision with regard to a target is unproductive,” she said.