The hawkish note struck by the Monetary Policy Committee (MPC) in its review earlier this month caused much nervousness in the markets. Four consecutive hikes that took the key policy rate above pre-pandemic levels and resulted in a 190-basis point tightening in a mere six months set off worries over whether the MPC, like the US Fed, would take its battle against inflation to extreme levels, hurting nascent economic recovery. But the minutes of the MPC meeting, released last week, allays such fears. They show considerable divergence of views and debate between MPC members, not just on the need for further rate hikes and liquidity withdrawal, but also on the ill-effects on growth should the RBI keep raising rates at this juncture.

In the six-member committee, Ashima Goyal dissented on the decision to hike rates by 50 basis points (she favoured a 35-basis point hike) and Jayanth Varma argued for a pause after taking the terminal rate to 6 per cent. These minutes, which contrast with the ‘we’ll do what it takes’ rhetoric of the US Fed, just maybe suggest, that the MPC may think twice before sacrificing growth at the altar of inflation control. The crux of Goyal’s arguments, rightly, was that monetary policy has a large lag effect on growth, with over-tightening causing significant harm which proves hard to undo. She cites the slowdowns induced by the rate-hike sprees of 2011, 2014 and 2018. Goyal deserves credit for making a strong case against India’s monetary policy blindly shadowing advanced economies. Commentators who have been fretting about India’s narrowing nominal rate differential with the US and predicting a foreign investor exodus, would do well to heed her points about India’s real rate spreads being reasonable. Low spreads in early 2000s didn’t deter foreign inflows, nor have high spreads of late brought in copious flows. The MPC would also do well to consider Varma’s point that it usually takes 3-4 quarters for policy rates to be transmitted. After all, he was well ahead of the curve in calling for tighter monetary policy to pre-empt inflation, right from 2021.

Members who voted for the hike such as Shashanka Bhide have built their case around managing household inflation expectations before they become sticky. Though the three Reserve Bank of India members, including the Governor, Rajiv Ranjan and Michael Patra have unequivocally voted for tight policies, they cite the need to maintain price stability and financial market stability, to keep growth alive. Overall, the minutes provide reassurance that the MPC, despite its official single-point mandate of targeting inflation, is giving careful consideration to growth and external factors in setting policy. The healthy dissent within MPC also underlines that committees, despite their dodgy reputation, may work better than individuals when it comes to deciding on crucial government policies that can make or break the economy.

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