RBI MPC member Jayanth Varma says reduction in repo rate will only occur when inflation subsides to 4% target

The Reserve Bank of India (RBI) has published the minutes of its monetary policy meeting held on October 6. A prevailing concern among RBI members is the potential impact of recurrent food and fuel price shocks on inflation expectations. As a result, they emphasise that monetary policy should prioritise the ongoing disinflation process until the 4% inflation target is achieved.

Jayanth R Varma, an External Member of the Monetary Policy Committee (MPC), in an interview to CNBC-TV18 stated that a reduction in the repo rate will only occur when inflation subsides. He stressed that a few quarters of inflation below 6% would not suffice as a reason for a rate cut. Varma reiterated that the RBI's inflation target is set at 4%, not below 6%.

"Our inflation target is 4% and not below 6%. We have to keep real interest rates high enough to drive inflation down to 4%. The repo rate will come down if inflation comes down. For couple of quarters where inflation is below 6% is not a reason for a cut," Varma said.

During the October 6th monetary policy meeting, the RBI decided not to increase its lending rate (repo rate), aligning with the consensus expectations of market analysts and economists. The repo rate remains unchanged at 6.5%, consistent with the August policy announcement.

Another external MPC member, Shashanka Bhide, concurred with Varma's perspective, highlighting the need for sustained decrease in inflation rate for any interest rate cut, given the potential impact of a weak monsoon on agricultural and food prices.

"We have had shocks coming externally and also the weather related supply disruptions over the past few months, but concern is also that it should not get generalised into the prices. The shocks that we saw in July and August seem to be transitory but there is this potential for continued effect of weak monsoon this year on agricultural prices, food prices and so on. So it is important that we see the inflation rates going down in a sustained manner for interest rates to be cut," Bhide said.

India experienced "below-average" cumulative rainfall during the four-month monsoon season from June to September, with a recorded measurement of 820 mm, deviating from the long-period average (LPA) of 868.6 mm. This deviation was attributed to strengthening El Niño conditions. In the four years leading up to 2023, India had witnessed "normal" and "above-normal" rainfall during the monsoon season.

Contrarily, MPC external member Ashima Goyal argued that India historically did not witness generalised inflation despite multiple supply-side shocks. Therefore, she sees no reason to believe that external shocks will lead to generalised inflation in the future.

"In the past India has seen multiple supply shocks but inflation has not generalised in Indian conditions because we have softness of demand, we don't have a tight labour market, we don't have excessive fiscal spending. So far we have seen that core inflation has not generalised due to the recurrent supply side shocks. So why should we think that it will generalise in future? I think inflation targeting is working, expectations are getting anchored. I think in India we are getting used to 4% inflation now," Goyal said.