Two external members of the monetary policy committee (MPC) of the Reserve Bank of India have cautioned that real interest rates could become very high if inflation glides towards the mandated 4 per cent target in 2024.

Ashima Goyal and Jayanth Varma were the only ones in the panel to suggest a policy repo rate cut, provided inflation glides to the 4 per cent target. The other members reiterated the need to keep a vigil over inflation amid volatile food prices.

The MPC on December 6 retained the policy repo rate at 6.5 per cent for the fifth consecutive time.

Minutes of the three-day meeting that were released on Friday showed Goyal raising concern over strong economic growth coming without an uptick in core inflation which fell to 4.8 per cent in the second quarter of the fiscal from 6.1 per cent in the last fiscal.

Goyal offered some reasons why core inflation has not kept the desired pace with the recovery in growth. Core inflation is inflation stripped of the fuel and food components

Firstly, there were no second-round effects that raised wages from the earlier commodity price shocks as the Indian labour markets are slack.

Second, falling costs and healthy sales have resulted in higher profits among firms, despite restraining demand.

Some firms have also reversed earlier price increases that passed on the higher costs.

With costs coming on the lower side for companies, Goyal said, core inflation should continue to converge towards 4 per cent and headline inflation should also converge to a stable core despite any further transient supply shocks.

At this point in the MPC meeting, Goyal sounded cautious about high real interest rates — money market interest rates relative to the inflation projection one year down the line.

“If inflation sustainably approaches 4 per cent by the middle of 2024 real rates can easily become too high if nothing is done. A repo of 6.5 per cent in 2018 and tight liquidity with headline inflation of around 4 per cent, even though core inflation was around 6 per cent, proved severely deflationary. Both headline and core inflation fell steeply over the next year,’’ she added.

Jayanth Varma called for the calibration of the policy repo rate to moderate the real rate. As inflation drops well below the upper tolerance band, it is necessary to prevent the real interest rate from becoming excessive.

While projected inflation two to four quarters ahead averages below 4.75 per cent, the current money market interest rates stand at 6.75 per cent — a real interest rate of more than 2 per cent, which is high.

``In my view, a real rate of 2 per cent exceeds the optimal rate. In the coming months, as we become more confident about the downward trajectory of inflation (apart from transient food price spikes), there would be a compelling case for continually calibrating the nominal policy rate to keep the real interest rate slightly below 1.5 per cent (based on projected inflation 3-5 quarters ahead),’’ he said.

However, other members reiterated the need to bring down inflation.

RBI governor Shaktikanta Das said the projected inflation (4.7 per cent) one year from now is perilously close to 5 per cent. ``In these circumstances, monetary policy has to be actively disinflationary. Any shift in policy stance now would be premature and risky.”