The two dissenting members of the RBI’s monetary policy committee (MPC) have warned about the adverse consequences on growth when they voted against a rate hike at the three-day meeting between February 6 and February 8, according to the minutes of the meeting released Wednesday.

Both Jayanth R. Varma and Ashima Goyal had also opposed the withdrawal of the accommodation stance taken at the meeting. However, the other four members of MPC maintained the RBI should not let down its guard in the fight against inflation.

The repo rate was raised 25 basis points to 6.50 per cent at the meeting, with the benchmark raised 250 basis points since May. Varma has been opposing the hikes in the last couple of meetings. He said a rate hike was not necessary amid diminished inflationary expectations and heightened growth concerns, the minutes showed.

He pointed out the monetary policy was “complacent’’ about inflation in the second half of 2021-22 and the economy is now paying the price in terms of unacceptably high inflation in 2022-23. In the second half of 2022- 23, the monetary policy has become complacent about growth, verma said. `I do fervently hope that we do not pay the price for this in terms of unacceptably low growth in 2023-24,’’ he noted.

He also said the withdrawal of accommodative stance was not warranted. The repo rate of 6.50 per cent very likely overshoots the policy rate needed to achieve price stability, and therefore further tightening is not desirable.

Ashima Goyal said excessive front-loading of rate hikes carries the risk of over-shooting, which should be avoided in the Indian context. Raising real policy rates — policy rate adjusted for inflation — to reduce demand has a stronger effect on growth than it does on inflation. ``Since there are more lags in monetary transmission in India, over-shooting can have persistent deleterious effects here, including instability,’’ she said.

The real rate is now positive and this could accentuate if inflation moderates, Goyal said. The real interest rate is almost “unity” given the RBI’s average inflation forecast for 2023-24 of 5.3 per cent and a repo rate of 6.25 per cent.

“A real repo rate of around unity suits the current stage of the cycle. It also balances the conflicting requirements of inflation and growth, savers and borrowers well. If a sharp rise in the real policy rate, substantially above unity, triggers a shift to a lower trend of private investment and growth, the sacrifice ratio of disinflation can be very high, as it was in the 2010s,’’ she cautioned.

RBI governor Shaktikanta Das felt that the moderation in inflation is largely due to lower vegetable prices and core inflation — consumer price inflation excluding the fuel and food prints — remains elevated and sticky at around 6 per cent.

Fed minutes to detail rate debate

The minutes from the Federal Reserve’s last policy meeting are expected on Wednesday to detail the breadth of debate at the U.S. central bank over how much further interest rates may need to rise to slow inflation and cool an economy that has remained stronger than expected despite monetary tightening.

The January 31-February 1 meeting ended with the Fed raising its benchmark overnight interest rate by a quarter of a percentage point, a return to a more standard rate-hike size after a year of sequential 75-basis-point and half-percentage-point increases. Meanwhile, New Zealand’s central bank raised its benchmark interest rate by a halfpoint Wednesday to 4.75 per cent as it continues trying to wrestle down inflation. The increase comes despite the economic pain that a devastating cyclone is already inflicting on many people.