India needs to lower interest rates to help its economy thrive, but members of the South Asian country's monetary policy committee (MPC) disagree on when such cuts should occur, according to conversations with two external members.
"We are currently in a catch-up growth period. Growth must accelerate in order to create employment and jobs for young people, to kickstart the investment cycle, and so on," Ashima Goyal, one of three external members of the six-member MPC, told Reuters.
"To the degree that inflation is within our tolerance zone and nearing target, we have not yet realized our full potential. That implies we can afford to develop faster."
However, Goyal stated that with economic growth now strong - predicted at 7.6 percent in 2023/24 - and various uncertainties on the inflation front, it was preferable to preserve stability and hence a status quo on interest rates.
Earlier this month, the MPC held the lending rate unchanged at 6.5 percent for the seventh consecutive meeting, after raising it by a total of 250 basis points between May 2022 and February 2023. The market expects rate cuts in early 2025, with Morgan Stanley ruling them out this fiscal year.
India's achievements in the disinflation process should not distract the MPC from the inflation trajectory's sensitivity to frequent supply-side shocks, Governor Shaktikanta Das stated in the meeting minutes, which were released on Friday. For the second consecutive meeting, just one member of the external MPC, Jayanth Varma, voted in favor of a rate reduction.
In an interview with Reuters following the release of the minutes, Varma stated, "My vote for a rate cut in nominal terms is actually a vote against rising real rates when growth is slackening."
"High real rates could also hinder private sector capital investment, which is critical in an environment of fiscal consolidation."
Goyal acknowledged that if interest rates were lowered, the real neutral rate would continue to be higher than 1% and monetary policy would remain contractionary. However, she expressed caution regarding the 2000s, since a hot private sector capital expenditure cycle resulted in high borrowing and a spike in defaults.
