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August 22, 2024

Minutes of the Monetary Policy Committee Meeting, August 6 to 8, 2024

[Under Section 45ZL of the Reserve Bank of India Act, 1934]

The fiftieth meeting of the Monetary Policy Committee (MPC), constituted under
Section 45ZB of the Reserve Bank of India Act, 1934, was held during August 6 to 8,
2024.

2. The meeting was attended by all the members – Dr. Shashanka Bhide, Honorary
Senior Advisor, National Council of Applied Economic Research, Delhi; Dr. Ashima
Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research,
Mumbai; Prof. Jayanth R. Varma, Professor, Indian Institute of Management,
Ahmedabad; Dr. Rajiv Ranjan, Executive Director (the officer of the Reserve Bank
nominated by the Central Board under Section 45ZB(2)(c) of the Reserve Bank of
India Act, 1934); Dr. Michael Debabrata Patra, Deputy Governor in charge of
monetary policy – and was chaired by Shri Shaktikanta Das, Governor.

3. According to Section 45ZL of the Reserve Bank of India Act, 1934, the Reserve
Bank shall publish, on the fourteenth day after every meeting of the Monetary Policy
Committee, the minutes of the proceedings of the meeting which shall include the
following, namely:

(a) the resolution adopted at the meeting of the Monetary Policy Committee;
(b) the vote of each member of the Monetary Policy Committee, ascribed to such
member, on the resolution adopted in the said meeting; and
(c) the statement of each member of the Monetary Policy Committee under sub-
section (11) of section 45ZI on the resolution adopted in the said meeting.

4. The MPC reviewed the surveys conducted by the Reserve Bank to gauge
consumer confidence, households’ inflation expectations, corporate sector
performance, credit conditions, the outlook for the industrial, services and
infrastructure sectors, and the projections of professional forecasters. The MPC also
reviewed in detail the staff’s macroeconomic projections, and alternative scenarios
around various risks to the outlook. Drawing on the above and after extensive
discussions on the stance of monetary policy, the MPC adopted the resolution that is
set out below.

Resolution

5. On the basis of an assessment of the current and evolving macroeconomic

situation, the Monetary Policy Committee (MPC) at its meeting today (August 8,
2024) decided to:
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 Keep the policy repo rate under the liquidity adjustment facility (LAF)
unchanged at 6.50 per cent.
Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25
per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per
cent.
 The MPC also decided to remain focused on withdrawal of accommodation to
ensure that inflation progressively aligns to the target, while supporting growth.

These decisions are in consonance with the objective of achieving the medium-
term target for consumer price index (CPI) inflation of 4 per cent within a band of +/-
2 per cent, while supporting growth.

Assessment and Outlook

6. The global economic outlook remains resilient although with some moderation in
pace. Inflation is retreating in major economies but services price inflation persists.
International prices of food, energy and base metals have eased since the last policy
meeting. With varying growth-inflation prospects, central banks are diverging in their
policy paths. This is creating volatility in financial markets. Amidst recent global sell
offs in equities, the dollar index has weakened, sovereign bond yields have eased
sharply and gold prices have soared to record highs.

7. Domestic economic activity continues to sustain its momentum. After a weak and
delayed start, the cumulative southwest monsoon rainfall has picked up with
improving spatial spread. By August 7, 2024, it was 7 per cent above the long period
average. This has supported kharif sowing, with total area sown as on August 2,
being 2.9 per cent higher than a year ago. Industrial output registered an expansion
of 5.9 per cent (y-o-y) in May 2024. Core industries rose by 4.0 per cent in June,
against 6.4 per cent in May. Other high frequency indicators released during June-
July 2024 indicate expansion of services sector activity, ongoing revival of private
consumption, and signs of pickup in private investment activity. Merchandise exports,
non-oil non-gold imports, services exports and imports expanded during April-June.

8. Going forward, the Indian Meteorological Department’s (IMD) projection of above

normal southwest monsoon and healthy kharif sowing will support improving rural
demand. The sustained momentum in manufacturing and services suggests steady
urban demand. High frequency indicators of investment activity as evident in strong
expansion in steel consumption, high capacity utilisation, healthy balance sheets of
banks and corporates, and the Government’s continued thrust on infrastructure
spending, point to a robust outlook. Improving world trade prospects could support
external demand. Headwinds from geopolitical tensions, volatility in international
commodity prices and geoeconomic fragmentation, however, pose risks to the
outlook. Taking all these factors into consideration, real GDP growth for 2024-25 is
projected at 7.2 per cent with Q1 at 7.1 per cent; Q2 at 7.2 per cent; Q3 at 7.3 per
cent; and Q4 at 7.2 per cent. Real GDP growth for Q1:2025-26 is projected at 7.2 per
cent (Chart 1). The risks are evenly balanced.

9. Headline inflation increased to 5.1 per cent in June 2024 after remaining steady at
4.8 per cent during April-May 2024. Worsening of food inflation pressures – driven
primarily by a sharp increase in prices of vegetables, pulses and edible oils along
with a pick-up in inflation across cereals, milk, fruits and prepared meals – pushed up
headline inflation. The fuel group remained in deflation, reflecting the cumulative
impact of the sharp cuts in LPG price in August 2023 and March 2024. Core (CPI
 3

excluding food and fuel) inflation at 3.1 per cent in May-June touched a new low in
the current CPI series, with core services inflation also at its lowest in the series.
10. Headline inflation has moderated from its peak but unevenly. Looking ahead,
food price momentum has remained elevated in July. In Q2:2024-25, though
favourable base effects are large, the sharper uptick in price momentum relative to
earlier expectations is likely to result in a shallower softening of CPI headline
inflation. Inflation is expected to edge up in Q3 as favourable base effects taper off.
The steady progress in monsoon, pick-up in kharif sowing, adequate buffer stocks of
foodgrains and easing global food prices are positives for containing food price
pressures. Adverse climate events remain an upside risk to food inflation. Crude oil
prices continue to be volatile on demand concerns and geopolitical tensions. The
revision in mobile tariff rates is likely to lead to an increase in core inflation.
Manufacturing, services and infrastructure firms surveyed by the Reserve Bank
expect a pickup in selling prices in the second half of this year. Households’ inflation
expectations have also gone up and consumer confidence has weakened. Assuming
a normal monsoon, CPI inflation for 2024-25 is projected at 4.5 per cent with Q2 at
4.4 per cent; Q3 at 4.7 per cent; and Q4 at 4.3 per cent. CPI inflation for Q1:2025-26
is projected at 4.4 per cent (Chart 2). The risks are evenly balanced.

11. The MPC expects domestic growth to hold up on the strength of investment
demand, steady urban consumption and rising rural consumption. Risks from volatile
and elevated food prices remain high, which may adversely impact inflation
expectations and result in spillovers to core inflation. There are also indications of
core inflation bottoming out. Accordingly, the MPC decided to remain watchful on
how these forces play out, going forward. The MPC stays resolute in its commitment
to aligning inflation to the 4 per cent target on a durable basis. In these
circumstances, the MPC decided to keep the policy repo rate unchanged at 6.50 per
cent in this meeting. The MPC reiterates the need to continue with the disinflationary
stance, until a durable alignment of the headline CPI inflation with the target is
achieved. Enduring price stability sets strong foundations for a sustained period of
high growth. Hence the MPC also considers it appropriate to continue with the
disinflationary stance of withdrawal of accommodation to ensure that inflation
progressively aligns to the target, while supporting growth.

12. Dr. Shashanka Bhide, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri
Shaktikanta Das voted to keep the policy repo rate unchanged at 6.50 per cent. Dr.
 4

Ashima Goyal and Prof. Jayanth R. Varma voted to reduce the policy repo rate by 25
basis points.
13. Dr. Shashanka Bhide, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri
Shaktikanta Das voted to remain focused on withdrawal of accommodation to ensure
that inflation progressively aligns to the target, while supporting growth. Dr. Ashima
Goyal and Prof. Jayanth R. Varma voted for a change in stance to neutral.

14. The minutes of the MPC’s meeting will be published on August 22, 2024.

15. The next meeting of the MPC is scheduled during October 7 to 9, 2024.

Voting on the Resolution to keep the policy repo rate unchanged

at 6.50 per cent
Member Vote
Dr. Shashanka Bhide Yes
Dr. Ashima Goyal No
Prof. Jayanth R. Varma No
Dr. Rajiv Ranjan Yes
Dr. Michael Debabrata Patra Yes
Shri Shaktikanta Das Yes

Statement by Dr. Shashanka Bhide

16. Subsequent to the June 2024 meeting of the MPC, there is cautious optimism
around the growth estimate of GDP of around 7 per cent in 2024-25. In July 2024, the
Economic Survey for 2023-24 by the Ministry of India, projected a GDP growth of 6.5-
7.0 per cent for 2024-25. The IMF, in its July update of the World Economic Outlook
raised India’s GDP growth projection to 7 per cent from 6.8 per cent indicated in its
April 2024 assessment. The latest round of RBI’s Survey of Professional Forecasters
conducted in July 2024 presents a median forecast of 7 per cent, up from 6.8 per
cent projected in May 2024. These estimates are lower than the growth estimate of
7.2 per cent provided in the MPC resolution of June meeting. The YOY real GDP
growth in 2023-24 exceeded 8 per cent in the first three quarters, dropping to 7.8 per
cent in Q4. In 2023-24, growth of personal consumption expenditure and exports of
goods and services experienced slower growth relative to gross fixed capital
formation. While a favourable south-west monsoon and lower inflation rate may
support higher personal consumption growth, sustained momentum of GFCF and
export growth would also be crucial for the high growth in 2024-25.

17. At the global level, IMF’s WEO July 2024 Update has retained the pace of
economic growth at 3.2 per cent, projected previously in April. The volume of world
trade in goods and services, has been projected to rise at a marginally faster pace in
2024 than previously projected, after near stagnation in 2023. These reflect a stable
external demand environment for India, although uncertainty emanating from slower
than expected pace of disinflation and the geopolitical conflicts have persisted.

18. In the domestic economy, growth stimulus, particularly on investment through

central government expenditure on infrastructure development has been preserved.
In the central government budget for 2024-25, the budget estimate for ‘effective
capital expenditure’ increased by about 20 per cent in nominal value over the
provisional actuals for 2023-24, marginally higher than the increase in 2023-24
(provisional actuals) over the actual spending in the previous year. In the case of
private investment, that includes corporate and household sector investment, the
 5

favourable policy incentives, emerging new opportunities in the economy and

improved longer term growth prospects would be the key drivers of accelerated
spending. The high frequency indicators of some of the investment activity such as
consumption of finished steel and import of capital goods for April-June 2024 reflect
rising level of investment activity; but output of cement in April-June and IIP for
capital goods in April-May point to contraction or modest improvement. FDI inflows
during April-mid July show significant increase as compared to the same period in
2023-24. The latest RBI’s survey of enterprises reflects greater optimism of improved
demand conditions in H2:2024-25 over H1.

19. A major push on consumption spending growth is expected to come from the
improved agricultural prospects supported by a favourable monsoon this year and the
moderating inflation rate. While the monsoon rainfall is expected to be at the normal
level and exceeding the level in the previous year, nature of its distribution during the
monsoon period and across regions would be of critical for raising agricultural
sector’s growth substantially from its estimated GVA growth of 1.4 per cent in 2023-
24. The sale of 2-wheelers and tractors in May-June 2024 either exceeding or
matching the levels seen in the same period in 2023 is a positive indication that rural
demand would be strengthened by a favourable monsoon this year.

20. The indicators of urban demand such as the number of domestic air passengers
and passenger vehicle sales for April-June 2024 exceed the levels YOY basis, but
the pace of growth has been lower. The pace of vehicle loans in April-June 2024 has
declined, compared to the previous year but remains in double digits. The latest
consumer confidence survey of urban households conducted by RBI reflects weaker
sentiments. A major factor affecting both rural and urban consumption would be the
moderate headline inflation rate.

21. Merchandise exports and imports registered positive growth in April-June

compared to negative YOY growth in the previous year. The service exports and
imports also rose in April-June this year YOY basis, although there was a decline in
exports and imports in June over May.

22. The purchasing manager indices (PMIs) for manufacturing and services declined
in June from a high in May but remain in expansion zone. The indicators of broader
level of economic activity, GST collections, E-way bills and non-food bank credit
growth at close to double digit rates YOY in April-June 2024 reflect a strong growth
momentum.

23. The outlook for growth in the current year, therefore, has both the positive
features that may help maintain the momentum of 2023-24 and downside risks
associated with both domestic and external factors. Considering these factors, the
GDP growth projection for 2024-25 has been retained at 7.2 per cent, unchanged
from the June MPC meeting. The quarterly estimates for GDP in 2024-25 are 7.1,
7.2, 7.3 and 7.2 in Q1-Q4, respectively. A significant driver of growth in the current
year is likely to be consumption growth.

24. Since July 2023, food inflation has remained at significantly high level compared
to the other two broad components of the headline inflation. From its peak of 10.6 per
cent in July 2023, food inflation (CPI for food and beverages) has declined over a 12-
month period, ranging from 7.6-8.4 per cent between January and June 2024. The
headline inflation has declined from 5.1 per cent in July 2023 to 4.8 per cent in May
and then risen to 5.1 per cent in June 2024. A progressive decline in food inflation
 6

would be necessary to achieve the 4 per cent headline inflation which can be
sustained.
25. Favourable monsoon aiding agricultural growth this year would ease the supply
side pressures to bring down the prevailing high food inflation. Appropriate supply
management strategies would always be needed to minimise the sharp changes in
the prices of perishable commodities. The evolution of price trends in the non-food
categories also need to be monitored even as the food inflation declines. The latest
RBI survey of urban households reflects an upturn in 3 months- ahead and 1 year-
ahead headline inflation rate, a continuation of the pattern seen in the previous round
of the survey. The survey of enterprises indicates expectation of increased growth in
output prices in Q2:2024-25 in the case of enterprises in the service and
infrastructure sectors as input cost pressures also rise. However, in the
manufacturing sector, growth in selling prices is expected to ease in Q2. A ‘Business
Inflation Expectations Survey’ of panel business leaders conducted in June 2024
registered a marginal uptick in the one-year ahead consumer price index, while
survey also estimated a marginal decline in the cost- based one-year ahead inflation
rate relative to the previous round of the survey.1 The divergence in the cost-based
inflation and consumer price inflation expectations may reflect the pressures of food
prices in the latter. The international food and energy prices outlook has reflected
stable or downward movement but risks from geo-political conflicts disrupting supply
chains are significant. Taking into account these factors, and assuming a favourable
monsoon rainfall, the average headline inflation rate for 2024-25 is projected at 4.5
per cent, the same as in the MPC meeting of June. With the actual reading of 4.9 per
cent inflation in Q1, projections for the remaining three quarters of 2024-25 are Q2 at
4.4 per cent, Q3 at 4.7 per cent and Q4 at 4.3 per cent. The projected headline
inflation in Q1:2025-26 is at 4.4 per cent.

26. The overall macroeconomic outlook is one of fairly strong growth and moderating
inflation trend. The setting for monetary policy is, however, marked by the risks to the
projected patterns of both inflation and growth. In both the cases, risks faced are
common: those associated with the monsoon and climate conditions, external
demand and price conditions, and financial conditions. Under a favourable monsoon
and climate scenario, food inflation is expected to moderate significantly and effective
supply management policies provide an effective framework to address price spikes
limited to a few commodities. However, persistent food inflation may require core
inflation to soften sufficiently to maintain the headline close to the target. High food
inflation would therefore hit growth adversely as it affects consumption and require
restrictive monetary policy to soften core inflation, especially when faced with
significant spillovers of persistent food price pressures to core components. The
average sequential month-over-month momentum of headline inflation is likely to be
high during July-September. Therefore, at this juncture it is necessary to maintain the
priority on achieving inflation target objectives.

27. Accordingly, I vote

i. to keep the policy repo rate unchanged at 6.50 per cent, and
ii. to remain focused on withdrawal of accommodation to ensure that inflation
progressively aligns with the target, while supporting growth.

Statement by Dr. Ashima Goyal

28. Global uncertainties continue. The Fed in indicating a cut in its September
meeting, pointed out that since monetary policy acts with a lag they can’t afford to

1
Misra Centre for Financial Markets and Economy, IIMA. https://www.iima.ac.in/faculty-
research/centers/Misra-Centre-for-Financial-Markets-and-Economy/BIES.
 7

wait until they reach their inflation target before cutting. That lag may be responsible
for the sharply adverse August jobs report that has stoked recession fears and
created market volatility. That a series of small signals were ignored, may have led to
a critical large one. Monetary policy needs to act well in time. Spillovers led the global
manufacturing PMI into contraction zone in July at 49.7.

29. In India food inflation has risen, but the heat wave has had less than the expected
effect, although household inflation expectations, which are sensitive to supply
shocks, have risen marginally. Vegetable inflation is transient, less than last year and
is already correcting with the good monsoon. Supply chains seem to be improving.
That Delhi now gets tomatoes from Karnataka as well as Himachal Pradesh has
reduced the price spike compared to last year. Core inflation is at 3.1% and even if it
rises should get anchored at the target, especially as global commodity prices are
softening. The conservative view tends to build in mean reversion, but the mean is
likely to have changed. Average Indian inflation is lower and trending down.

30. Although RBI inflation projections are rising after falling due to base effects, they
fall again. So the overall trend into next year is downwards. The Q1 FY26 projection
is 4.4%. Many analysts expect 4% headline inflation by summer next year as the
base effect and good monsoon sharply reduces food inflation, implying the expected
real policy rate is 2.5%. Since Indian inflation is not well measured, and could be over
or under-estimated, too much precision with regard to a target is unproductive.

31. An EM is subject to many shocks, so it is better if forward guidance on rates is

data-based, communicating only the reaction function. Even so, lags in action imply it
is necessary to be forward-looking and take decisions based on expected future
variables.

32. A view sometimes expressed is that government actions affect growth, not those
of central banks (CBs). But then why would the MPC have growth as an objective?
Since growth in economies in transition especially, is non-steady state and non-
linear, excess monetary tightening can trigger a switch to a lower growth path so that
the growth sacrifice is large.

33. There are some negative signals for Indian growth also. Early results of listed
private manufacturing companies show sales and profits softened in Q1 FY25.
Consumer confidence fell and the business expectations index has been moderating
since Q4 FY24. The RBI Q1 FY25 growth forecast has been reduced.

34. Overall Indian growth is resilient, but it is still below potential. The Q1 FY25
softening in government expenditure was an election phenomenon and will reverse,
while the good monsoon is likely to reverse the heat wave related softening in
consumer expenditure.

35. Many experts had expected India to revert to low pre-pandemic growth. But
growth has been robust at an average of 8.3% for 3 years now—this is beyond base
effects. Something is different, including macroeconomic policy, which effectively
smoothed shocks. Rising diversity and scale have also increased shock absorbing
capacity.

36. Since this is my last MPC meeting I would like to record here my appreciation of
policy-making in this period that helped India overcome major external shocks and
set it on a path of high growth with stability. It was a privilege to watch its working
from close quarters.
 8

37. But continued vigilance is the price of success. I will flag some of the principles
(marked P) that in my view were responsible for outperformance and the risks in
departing from these.

38. Real variables were kept near equilibrium. This is an indicator of countercyclical
smoothing of shocks (P1). Large deviations of real rates can make growth volatile, as
happened in the 2010s.

39. Another major factor that worked well for India in the last 3 years was good
monetary-fiscal coordination (P2). The budget shows a conservative fiscal deficit
target overachieved, infrastructure spending maintained and other ongoing supply-
side improvements (P3) that will reduce inflation currently as well as over time. These
are essential for non-inflationary growth in India. Of course, it is always possible to do
more and further raise potential output. In particular, it is important to shift from
interventions that distort resource allocation to those that improve productivity in
agriculture.

40. With fiscal policy doing its part, monetary policy must also keep the repo rate as
low as is consistent with reaching the inflation target. It is not that reforms must come
before monetary action. In a dynamic economy both can act together. This type of
coordination is compatible with CB independence and credible anchoring of inflation
expectations (P4) since action is conditional on inflation outcomes.

41. Svensson had warned long ago that flexibility (P5) in inflation targeting (IT) is very
important for its social acceptance.2 Interest rates affect many groups in opposing
ways. A low positive repo is also called for since it balances (P6) these differing
interests. It worked well in the last few years also reducing core inflation to historic
lows. Deviations can lead to protests in a democracy and eventually dilute IT and
undermine coordination. As the real repo rises, we are beginning to see such
comments, for example in the current Economic Survey.

42. This is unfortunate since the inflation target can serve as a fair benchmark for
contesting groups. Trend inflation in any sector should not rise above the target,
although spikes can be looked through as expectations remain anchored. Those
proposing a higher trend price rise should, in time, become aware that as aggregate
inflation rises real gains tend to be lost.

43. There is a view that the neutral real policy rate (NIR) rises with growth. But this
holds only for departures from steady-state growth and need not apply if higher
transitional growth is absorbing hitherto excluded workers with low productivity and
consumption.3 The other important country-relevant issue that a current estimation
must include is falling risk premia (P7) due to fiscal, monetary and regulatory actions
that are reducing levels and spreads in interest rates. For example, lower volatility in
the FX market is reducing interest differentials required with the rest of the world.

44. A clear counter-factual to conservative estimations based on methods developed

for advanced economies (AEs) is China, whose sustained high catch-up growth was
supported by low real interest rates.

2
Svensson, L.E.O (2000), 'Open-economy inflation targeting', Journal of International Economics, vol.
50, pp. 155-83.
3
Goyal, A., 2009. `The natural interest rate in emerging markets', in: Dutta, B., Roy, T. and
Somanathan, E. (Eds.), New and Enduring Themes in Development Economics. World Scientific
Publishers.
 9

45. With a few exceptions market analysts that are most articulate about policy rates
are mainly interested in the nominal level and its changes in order to guide their
clients’ market positions. They will accept any estimate of NIR policy-makers give
them, since commitment to a NIR value helps them make predictions.

46. The real rate affects the real sector. It is the MPC, whose mandate covers all
groups, that has to be concerned about ‘correct’ real rates in order to balance
interests, respond to pressing priorities and seize opportunities. The first priority for
India is to create more productive jobs in order to utilize the demographic dividend as
well as to prevent possible political instability.

47. Even if growth is high, it has to rise to its full potential. A falling trend and low core
inflation indicates growth is below potential,4 implying real rates are above the NIR
and there is scope to reduce the repo rate and raise growth. This simple guide cuts
through complexities in the estimation of NIR. The MPC must make sure, if the
approach to target is long and slow, the real policy rate does not deviate too far from
the NIR during that period.

48. Credit eventually creates deposits through rising incomes and savings, but in the
meanwhile banks should maintain adequate liquidity buffers. We are seeing market
rates coming down as liquidity improves with government spending. The call money
rate is also near the repo rate. This should be maintained. Adequate liquidity is
required along with prudential policies that create good incentives for the financial
sector (P8), especially since the sources of liquidity are limited for many parts of
India’s financial sector leading to liquidity hoarding. Balance requires that over-
strictness is avoided.

49. In view of the above arguments I vote for a 25 bps cut in the repo rate and a
change in the stance to neutral. These are necessary to lower risks of departure from
the principles outlined above, which have contributed to policy successes in the last 3
years.

Statement by Prof. Jayanth R. Varma

50. For the last several meetings, I have been expressing concerns about the
unacceptable growth sacrifice induced by a monetary policy that is excessively
restrictive. The majority of the MPC however do not share this concern, perhaps
because they think that the Indian economy is already growing at close to its potential
growth rate. I think that such a view reflects (a) an unwarranted pessimism about the
growth potential of the economy and (b) an overly sanguine expectation about growth
in ensuing quarters. I disagree with both prongs of this assessment.

51. Multiple policy measures during the last few years including digitalization, tax
reforms, and a step up in infrastructure investment have in my view boosted the
potential growth rate of the Indian economy to at least 8 per cent. A confluence of
demographic and economic factors present India with a rare opportunity to accelerate
its growth over the next decade or more. It is one of the tasks of monetary policy to
ensure that this opportunity is not squandered by excessively high real interest rates.
In this context it is depressing that India’s projected growth rates for 2024-25 and
2025-26 (despite being among the highest growth rates of any large economy in the
world), are significantly lower than the potential growth rate of the Indian economy,

4There is a literature that uses realized inflation to estimate potential growth, for example, Svensson, L. E.O.
Woodford, M. 2003. ‘Indicator variables for optimal policy’, Journal of Monetary Economics, Volume 50, Issue 3,
Pages 691-720.
 10

and also well below what is needed at the current stage of our demographic transition
to meet the aspirations of the new entrants into the workforce.

52. At the same time, the majority of the MPC is, in my view, too sanguine about
growth in ensuing quarters. Data from various RBI surveys show multiple early
warning signals that growth may be already slowing down. Expectations of robust
growth depend heavily on an expectation that private capital investment will pick up
soon. However, we have been hoping for this revival for many quarters now, and
hope is not a strategy.

53. The RBI’s projections show inflation bouncing up and down from quarter to
quarter, but the trend line is clearly downward, and the projected inflation for the first
quarter of 2025-26 is 4.4 per cent. On a forward looking basis, the current repo rate
of 6.5 per cent translates into a real rate of 2.1 per cent. This is well above what is
needed to drive inflation to the target of 4 per cent. It is true that disinflation has been
protracted, and therefore restrictive monetary policy has to be maintained for a few
more quarters. But a real interest rate of 1.5 per cent is sufficiently restrictive in this
environment. This means that a reduction of over 50 basis points in the repo rate is
needed within a short span of time, but it makes sense to move cautiously in this
direction. I therefore vote to reduce the repo rate by 25 basis points, and to change
the stance to neutral.

Statement by Dr. Rajiv Ranjan

54. Since the last monetary policy committee meeting, risks to the global economic
outlook have increased, while the domestic economy continue to exhibit resilience.
Domestically, risks to inflation are higher than risks to growth at the margin. Let me
elaborate on each of these.

55. Even though Q1:2024-25 growth projections have been slightly revised
downwards, I am now more confident of overall growth holding up in 2024-25 mainly
on three counts. First, consumption, which was lagging during 2023-24 will recover in
the current year led by rural consumption on the back of better progress of the
monsoon, higher sowing and moderating inflation. Higher FMCG sales in the rural
areas during the last two quarters bears testimony to this trend. Second, the Union
Budget 2024-25 is growth positive with provisions for higher capital and revenue
expenditure. Capital expenditure is budgeted to grow by 17.1 per cent (on top of 28.2
per cent in 2023-24), while revenue expenditure excluding interest payments and
subsidies is budgeted to grow by 7.4 per cent (1.2 per cent last year) with an
absolute increase of about ₹ 82,244 crore from the Interim Budget estimates. Fiscal
consolidation via higher receipts and medium-term debt reduction path as envisaged
in the budget will be growth positive in the long run.5 Third, investment activity is
picking up as witnessed from improving capacity utilisation, pick up in investment
intentions, and continued buoyancy in steel consumption and capital goods imports.
Strong FDI flows at the start of the year are also positive from capex cycle viewpoint.
Thus, the growth of the Indian economy is likely to be sustained by all growth drivers
working in tandem. The large divergence between gross value added (GVA) and
GDP growth is expected to narrow down substantially in the current fiscal as central
government subsidies are budgeted to contract moderately compared to a large
contraction seen in the previous year.

5Higher RBI dividends have been utilised partly to reduce fiscal deficit and partly directed towards higher revenue
expenditure.
 11

56. On the other hand, inflation outlook remains uncertain. The upturn in headline
inflation in June to 5.1 per cent has been on account of a substantial pick-up in price
momentum to around 1.3 per cent (from 0.5 per cent in May) though it was
considerably offset by a favourable base effect of around 1.1 per cent. The surge in
headline CPI price momentum was driven by the food component even as core (CPI
excluding food and fuel) inflation collapsed to a new low in the current CPI series.
High frequency food price indicators point to continuing strong food price momentum
in July, though large favourable base effects are likely to more than offset it leading to
a softening in inflation. Further, core inflation has also likely bottomed out in June,
primarily as the impact of the mobile-tariff revision is likely to get reflected in CPI core
inflation numbers in July. As a result, there has been changes to the quarterly path of
inflation projections with Q2 projections being revised upwards, even as full year CPI
inflation projection has been retained at 4.5 per cent.

57. In the recent period, food inflation has remained persistently elevated, averaging
8 per cent since July 2023 and has contributed to around 75 per cent of the headline
inflation during April-June 2024. Such persistent food inflation pressures cannot be
ignored considering the high share of food in household consumption basket and risk
of its spillovers to non-food core CPI components. In this scenario, monetary policy
should continue to remain actively disinflationary to ensure that inflation and inflation
expectations remains durably aligned to the target rate.

58. The old debate of ‘core versus headline’ that was well settled when in 2016 we
had adopted the flexible inflation targeting framework with headline as our target in
line with international best practices has resurfaced with persistent divergence
between food inflation that has remained elevated and subdued core inflation.6 As
long as food constitutes an important segment of the consumer basket and food
inflation shows signs of persistence, one cannot ignore food in the CPI basket given
the common perception of households to look at food prices while evaluating
inflation. Moreover, the likely indirect spill overs from the interrelation of prices over
time and across sectors for both households and firms remains important.7 Recent
cross-country evidence indicates an increase in the size and significance of inflation
persistence post pandemic, thus, slowing down the disinflation journey even after
energy price shocks and supply disruptions have abated.8 All this complicates the
central bankers’ task and demands caution in policy conduct. Any adjustment of the
goalpost, apart from undermining central bank’s hard-earned credibility, may have to
bear the wrath of the markets, thus wiping out all the good work done so far.

59. Developments on the global front further add to the uncertainty as the outlook is
evolving at a fast pace amidst ongoing geopolitical tensions and various data
releases leading to changing perceptions about global economic prospects adding to
financial market volatility. Some countries have embarked on easing cycle as their
growth has started exhibiting withering signs and headline inflation has started
softening, despite core inflation ruling above the headline inflation. On the other
hand, a few countries are waiting for supply shocks to abate and favourable
economic conditions to emerge before pivoting towards a rate cut cycle, despite low
core inflation. There is also a third set of countries that are hiking their benchmark
rates due to their country-specific factors. Under these circumstances, it is important
that we define our own policy path based on prevailing domestic growth-inflation

6 For details, please refer Report of the Expert Committee to Revise and Strengthen the Monetary Policy
Framework (Chairman: U.R. Patel, January 2014).
7 The Pass-Through from Inflation Perceptions to Inflation Expectations by Stefanie Huber, Daria Minina, Tobias

Schmidt :: SSRN (August 2023); How euro area firms’ inflation expectations affect their business decisions
(europa.eu) (July 2024)
8 https://doi.org/10.17016/2380-7172.3562 (July 2024)
 12

dynamics. We cannot let down our guards against inflation at this juncture, when
supply shocks are proving to be so persistent.

60. Going ahead, however, some positive developments are envisaged. Headline
CPI inflation is projected to continue on the disinflation path towards the target rate,
though gradually, with inflation projections indicating a significant moderation by Q4
of the financial year. Steady progress in monsoon with a favourable La Nina; higher
kharif sowing; a likely favourable rabi season on the back of good soil moisture
conditions; and softening global food prices may lead to a more than anticipated
decline in food inflation pressures over the course of the year. This could open up the
window for monetary policy to change its course. At the current juncture, however,
more clarity and definiteness are needed - on food inflation outlook; spillovers of food
price pressures to core inflation; domestic demand; and global risks. Till then, I will
prefer to stay the course and remain cautious and watchful for these uncertainties to
play out. Resilient growth gives us the space to remain focussed on inflation and
maintain status quo till some of these risks are mitigated and the trade-offs are
minimised. Accordingly, I vote for status quo on both stance and rate in this policy.

Statement by Dr. Michael Debabrata Patra

61. The wedge between headline and food inflation has been widening, and stalling
the alignment of the former with the target. Taking into account double digit inflation
in salient food categories such as cereals, pulses, spices and vegetables for several
months, empirical evidence points to a rise in the time varying persistence of food
inflation, i.e., it is taking longer to revert to its trend after a shock. There is also
evidence of the time varying trend of food inflation increasing, negating the gains
made through core disinflation.

62. Higher trend food inflation is spilling over into inflation expectations of households
and consumer confidence. In the case of the former, even their current perceptions
have now started rising along with outer-term expectations. The recent assessment
of the neutral rate of interest suggests that the disinflationary stance of monetary
policy is appropriate, especially in view of the persisting positive gap between actual
inflation outcomes and the target. Potential output is now rising faster than its pre-
pandemic pace; even so, a positive output gap has opened up – actual output is
running ahead of potential output - warranting vigil on aggregate demand
developments.

63. Monetary policy is an instrument for modulating aggregate demand. Food price
shocks may originate outside the realm of monetary policy and initially manifest
themselves in supply mismatches, but when their effects stay in the inflation
formation process, they can propagate through second order effects and get
generalised to which monetary policy cannot be insensitive. Persistently rising prices
are always and everywhere a reflection of too much demand chasing too less supply
even if it is a supply shortfall that starts the price spiral. It is the remit of monetary
policy to adjust demand conditions to the state of supply because this accumulation
of price pressures threatens the outlook for both inflation and growth. The monetary
policy committee (MPC) of the RBI has committed to align inflation durably to the
target. That is not yet achieved; any faltering from this commitment could undermine
the prospects of the Indian economy. Hence, I vote for keeping the policy rate and
the stance of withdrawal of accommodation unchanged in this resolution.
 13

Statement by Shri Shaktikanta Das

64. Global economic activity has remained stable since the last meeting of the MPC
in June 2024. Incoming data, however, presents a mixed picture with signs of
slowing growth momentum in certain major economies. Inflation is on a softening
path, but persistence in services prices is imparting downward rigidity. With changing
growth- inflation dynamics, several central banks have become less restrictive by
way of rate cuts and forward guidance. At the same time, there are a few others who
have hiked their interest rates. Market expectations are constantly varying on the
pace and timing of policy pivots by central banks, resulting in financial market
volatility.

65. In this mixed global backdrop, India is treading on a steady growth path driven
primarily by domestic factors. High frequency indicators suggest that momentum of
activity witnessed during Q4:2023-24 continued during Q1:2024-25, though with
some slowdown in corporate profits, lower general government expenditure and core
industries output. Kharif sowing is progressing well thanks to the south-west
monsoon. Improving reservoir levels augur well for the rabi output. Manufacturing
and services activity remain buoyant.

66. The pickup in agricultural activity is expected to further boost rural consumption.
Urban consumption continues to be steady. Budget allocation for government capex
remains robust. Private corporate investment is also gaining steam with capacity
utilisation reaching its highest level in 11 years. Healthy balance sheets of banks and
corporates provide a congenial environment for private sector investments to gather
pace. Indications of capacity creation in a few industries and growing investment
intentions are getting visible.9 Improving global trade volume is expected to provide
support to external demand.

67. Since the last bi-monthly policy review, headline inflation has seen upward
movement in June to 5.1 per cent, as food inflation pressures increased and offset
the impact of subdued core (CPI excluding food and fuel) inflation and deflation in the
fuel group.

68. Going forward, headline inflation in July and Q2 of the current financial year are
expected to be lower, given their base effect advantage; but with food inflation
pressures showing little signs of abatement in the near-term, and household inflation
expectations picking up, monetary policy has to remain vigilant to potential spillovers
of food price pressures to the core components. This is critical for the ‘last mile of
disinflation’ and anchoring of inflation expectations. Food inflation may soften due to
good monsoon, steady improvement in kharif sowing, rising reservoir levels and a
likely favourable rabi season output. Uncertainty, however, comes from frequent
recurrence of adverse weather events, resurgence of geo-political tensions and
financial market volatility. Further, core inflation might just have bottomed out.

69. The calibrated increase in policy repo rate by 250 basis points since May 2022
and subsequent change of stance to withdrawal of accommodation has facilitated
gradual disinflation over 2022-23. With a forecast of 4.5 per cent headline inflation for
2024-25, the present policy repo rate is broadly in balance and avoids costly sacrifice
of domestic economic activity.

9 As per RBI Surveys, manufacturers’ investment intentions for 2024-25 improved, with most firms planning
similar or higher investments compared to last year. Funds raised for capex purpose by the private corporates
during Q1:2024-25 through different channels (banks/FIs, ECBs, IPOs) remained strong.
 14

70. At this stage, when durable disinflation to the target is still a work in progress, the
issue of equilibrium natural interest rate is premature. Policy making in the real world
cannot be based on an abstract, theoretical and model specific construct which is
unobservable and time varying. Hence, any justification for policy easing based on so
called high real rates can be misleading.

71. Introduction of flexible inflation targeting (FIT) in 2016 was a major structural
reform. Over the last 8 years, it has gained in credibility and facilitated positive
outcomes for the economy, despite the huge global shocks. Its credibility needs to be
preserved and sustained.

72. Inflation is gradually trending down, but the pace is slow and uneven. Durable
alignment of inflation to the target of 4.0 per cent is still some distance away.
Persistent food inflation is imparting stickiness to headline inflation. Inflation
expectations need to be kept anchored. Spillovers of food inflation to core have to be
avoided. At such a crucial juncture, steady growth impulses are allowing monetary
policy to unambiguously focus on supporting a sustained descent of inflation to the
target. The best contribution that monetary policy can make for sustainable growth is
to maintain price stability. Taking all these factors into consideration, I vote for
keeping the policy repo rate unchanged at 6.5 per cent and continuing with the
stance of withdrawal of accommodation.

(Puneet Pancholy)
Press Release: 2024-2025/949 Chief General Manager