India’s economic recovery could be impacted by further interest rate tightening, a member of the monetary policy committee (MPC) cautioned.

"Monetary policy is now dangerously close to levels at which it can inflict significant damage to the economy," said Jayanth R Varma, who is one of the six members of the RBI’s rate-setting panel.

“I am of the view that the current level of the repo rate is high enough to keep inflation below the upper tolerance band on a sustained basis and also glide it towards the middle of the band," Varma added.

The RBI announced a pause in the key short-term lending rate for the second time in a row, but the minutes of the June MPC released by the central bank today showed differences among the members about the future course of rate hikes.

As per the minutes of the MPC meeting, Varma said that with every successive meeting, the monetary policy stance is becoming more and more disconnected from reality.

“There are significant risks to both inflation and growth, and the process of bringing inflation under control is still very much work in progress. It would be premature to declare victory at this point of time based on the inflation prints of just a couple of months. In this context, I am not at all comfortable with the self-congratulatory tone of the statement in the MPC Monetary Policy Statement,” Varma, a government-appointed member on the panel and a Professor at the Indian Institute of Management, Ahmedabad, pointed out.

According to the statement, the “MPC took note of the moderation in CPI headline inflation in March-April into the tolerance band, in line with projections, reflecting the combined impact of monetary tightening and supply augmenting measures." 

In June, the MPC decided unanimously to keep repo rate unchanged at 6.5%. 

RBI Governor headed MPC consists of three members from the central bank and three government nominees.

External member Ashima Goyal, as per the minutes, said the quick succession of repo rate raises has brought the real rate to near equilibrium levels, which has prevented overheating as well as over-tightening of demand and helped to anchor inflation expectations. The slowdown and pause were also well-timed.

“As expected, inflation falls. However, it is important that real repo rate does not rise too high,” she said.

While voting for status-quo in interest rates along with the other five members, RBI Governor Shaktikanta Das said that monetary actions have brought retail inflation within the target band (2-6 per cent), but the job is only half done. 

As per the minutes of the MPC meeting held from June 6 to 8, Das said India’s macroeconomic fundamentals are strengthening and growth prospects are steadily improving and becoming broad-based.

Inflation, he said, has eased and the external sector outlook has improved. Balance sheets of banks and corporates look resilient and healthy, thereby engendering twin balance sheet advantage for growth.

“Our job is only half done, having brought inflation within the target band. Our fight against inflation is not yet over. We need to undertake a forward-looking assessment of the evolving inflation-growth outlook and stand ready to act if the situation so warrants.

“Beyond this and given the prevailing uncertainties, it is difficult to give any definitive forward guidance about our future course of action in a rate tightening cycle,” he said as per the minutes.

While voting for keeping the repo unchanged at 6.5%, MPC member and RBI deputy governor Michael Debabrata Patra said his vote for maintaining the status quo on the policy rate should be seen as taking a middle stump guard to prepare for a bouncier pitch.

“Holding the rate unchanged should not be interpreted as the interest rate cycle having peaked, but as a period of careful evaluation of a decision on the extent of additional policy tightening, if needed,” he said.

RBI’s executive director and MPC member Rajiv Ranjan said monetary policy actions would need to be calibrated carefully by assessing the impact of past actions, meticulously scrutinising the incoming data, and responding appropriately to the evolving macroeconomic conditions.

External member Shashanka Bhide opined as the transmission of the policy changes through the economy to reach the inflation target is subject to unpredictable developments, it is necessary to ensure that the policy framework is focused on achieving the inflation target while supporting growth.

The 44th bi-monthly monetary policy is scheduled to take place during August 8-10, 2023.