Rate Hike Was Not Warranted, Says RBI MPC Member Jayanth R Varma

To combat high inflation, the RBI raised the repo rate by 25 basis points to 6.50 per cent in its February monetary policy meeting

The minutes of the February 6-8 monetary policy committee (MPC) meeting released by the RBI on Wednesday revealed that two of the three external members were not in favour of raising the key interest rate this month. According to the MPC minutes, committee member Jayanth R Varma was of opinion that raising the key interest rate was "not warranted" as inflationary expectations were diminishing and economic growth remained a concern.

“I believe that the 25 basis point rate hike approved by the majority of the MPC is not warranted in the current context of diminished inflationary expectations and heightened growth concerns. I, therefore, vote against this resolution," said Varma.

To combat high inflation, the RBI raised the repo rate by 25 basis points to 6.50 per cent in its February monetary policy meeting. In the previous 10 months, the central bank had raised rates six times in a row.

In February, four of the six voting members supported the 25 bps rate increase and the continuation of the policy stance of maintaining focus on accommodation removal to ensure that inflation stays within the goal going forward while fostering growth. 

Jayanth R Varma and Ashima Goyal were not in favor of raising rates any further, MPC minutes showed on Wednesday. 

“In the second half of 2022-23, monetary policy has, in my view, become complacent about growth, and I fervently hope that we do not pay the price for this in terms of unacceptably low growth in 2023-24,” Varma said. Jayanth R Varma is a professor at the Indian Institute of Management, Ahmedabad.

Three RBI officials — Governor Shaktikanta Das, Deputy Governor Michael Debabrata Patra, and Executive Director Rajiv Ranjan — and external members appointed by the Central government make up the six-member MPC.

Ashima Goyal, emeritus professor at the Indira Gandhi Institute of Development Research in Mumbai, voted in favor of delaying rate increases. Goyal said, “It is better to give time for possible softening of both inflation and growth and effects of past monetary tightening to play out.”

After decreasing for two straight months, India's retail inflation rate increased in January to 6.52 per cent. The RBI has decreased its inflation prediction for the current fiscal year by 20 basis points to 6.5 per cent in its February monetary policy, with inflation expected to average 5.7 per cent from January to March. Core inflation, meanwhile, continued to be excessive and sticky over the past three months, as the RBI noted.

RBI deputy governor Michael Patra said that inflation remains high and remains the biggest threat to the macroeconomic outlook. 

"Restoration of price stability – as statutorily mandated – will provide a solid foundation for a growth trajectory that actualises India’s potential," Patra said.

Taking into account the height of inflation, current and projected, monetary and financial conditions still reflect some slack, although they are moving into tighter territory with the follow-through of recent monetary policy actions, Patra added.

The next MPC meeting is scheduled for April 3-6.