Though India’s central bank has recently carried out its second 25-basis-point rate cut of the year, the minutes of the latest meeting on the subject reveal that two of its top officials had divergent views.
At the Reserve Bank of India’s monetary policy meeting held on April 4, Governor Shaktikanta Das argued for a rate cut, while Deputy Governor Viral Acharya disagreed.
Das’s view coincided with that of the current National Democratic Alliance coalition government, led by Prime Minister Narendra Modi. Facing election, the government wants the monetary situation to ease further.
The meeting minutes show that while Das cited falling growth and loss in investment traction as reasons for easing, Acharya called for caution, pointing to rising oil prices and a risk of an inflation spike.
The six-member Monetary Policy Committee decided to take it for a vote and in a 4-2 majority decision they reduced the policy repo rate – the rate at which it lends to banks – by 25 basis points to 6%. While Das along with RBI Executive Director Michael Patra and committee external members Ravindra Dholakia and Pami Dua voted for the rate cut, Acharya and committee external member Chetan Ghate voted against it.
Das had argued that with investment demand in the country losing traction, the deceleration in exports could further impact investment activity. With the inflation outlook looking benign, he felt the central bank should address the challenges to the sustained growth of the Indian economy.
Acharya pointed out that inflation rate, excluding food and fuel, remains high at 5.5% and it has been so for the past 12 months. It was the low food prices that were keeping headline inflation low, he argued, and the food prices might not remain benign for long.
It’s worth noting that although the central bank has reduced benchmark interest rates twice this year, banks have been reluctant to pass the cuts on to customers. The lenders are finding it difficult because they are facing a mismatch between deposits and credit growth.
Das was appointed as RBI Governor in December, following Urjit Patel’s abrupt resignation over differences with the government.
Das’s two interest rate cuts have reversed Patel’s increase of 50 basis points in 2018. He also eased curbs, which had been imposed by Patel, on lending to weak banks.
Acharya was made RBI Deputy Governor in December 2016 during Patel’s tenure. He follows the latter’s tight-fisted approach towards lending rates and dealing with bad loans of ailing banks.
Acharya kicked up a storm last October when at a public function he raised concerns regarding governmental interference in the functioning of the central bank and warned that its autonomy was at risk.
Around two months later Patel resigned and it was expected that Acharya might follow suit. However, he opted to stay on.