Members split on economic growth prospects

All the external members of the Reserve Bank of India’s monetary policy committee (MPC) flagged risk of slowing growth, while the internal members seemed more sanguine about the growth prospects, the minutes of the monetary policy review meeting held earlier this month showed.

All the members unanimously agreed to keep the repo rate unchanged at 6.5 per cent in the latest review. Between May 2022 and February 2023, the policy repo rate was increased by 250 basis points (bps).

“…domestic growth impulses remained buoyant in Q4FY23. Looking ahead, the thrust on infrastructure spending by the government would support investment activity,” RBI Governor Shaktikanta Das said. Though core inflation might soften going forward, Das cautioned that the overall situation remained dynamic and fast evolving.

“Milk prices may remain firm in the lean summer season on tight demand-supply balance and high fodder costs. The rising uncertainty in international crude oil prices also warrants close monitoring,” he added.

External member Ashima Goyal highlighted her concern on growth. “Although growth is resilient, there are signs of slowdown in some high-frequency data. Softening non-oil non-gold imports point to weakness in domestic demand; slowing exports are affecting manufacturing; rising loan rates are reducing demand for low income housing,” she said. Goyal also said the real policy rate was greater than one, and that a further rise in real interest rates was best avoided since high real rates could trigger a non-linear switch to a low growth path.

Another external member Jayanth Varma cited two inflation risks that came to the fore since the February policy – a spike in global crude oil prices because of OPEC+ cutting production and monsoon. “It is only around mid-April that scientists are able to provide monsoon forecasts with some degree of confidence, and the forecast accuracy improves towards the end of May. In this meeting, therefore, the MPC has no choice but to operate under the default assumption of a normal monsoon,” he said.

On the growth front, he said early warning signs of a possible slowdown were visible to a greater extent than in February. “In the current situation of high inflation, monetary policy does not have the luxury of responding to these growth headwinds,” he said.

Deputy Governor M D Patra said inflation remained the biggest risk to the outlook of the Indian economy. “The momentum of economic activity in India is broadening, and slack is being pulled in. The underlying price build-up indicates that demand pressures remain strong, especially for contact-intensive services. Hence, inflation remains elevated and generalised,” Patra said.

He said the path of future inflation was vulnerable to several supply shocks, and that the MPC must remain on high alert and ready to act pre-emptively if risks intensified to both sides of its commitment: price stability and growth.

“The process of getting inflation back to target could turn out to be gradual and uneven, but the mission of monetary policy is to shepherd this process through potential bumps while containing second round effects and anchoring inflation expectations,” Patra said.

Another internal member Rajiv Ranjan said, “New incoming information suggests that the growth outlook for 2023-24 has improved with investment revival likely to become more entrenched along with a lesser drag from external demand.”

He said while inflation remained above the comfort zone, there were reasons for optimism about the overall rabi harvest and decline in international food prices. He said the RBI’s decision to keep interest rates unchanged was a ‘wait and watch pause’. “It is neither a ‘premature’ pause nor a ‘permanent’ one,” Ranjan said.

External member Shashanka Bhide said the growth performance pointed to both uneven growth across production sectors and subdued growth in the more recent quarters of FY23.

“The key concern on the growth front in the immediate future is the drag caused by the weak external demand conditions. The impact of any adverse weather conditions on Indian agriculture provides additional downside risk to the growth trajectory,” Bhide said.