India's monetary policy has become complacent about growth and the country may pay the price for this in terms of unacceptably low growth in 2023-24, according to Reserve Bank of India's monetary policy committee (MPC) member Jayanth Varma.

"In the second half of 2021-22, monetary policy was complacent about inflation, and we are paying the price for that in terms of unacceptably high inflation in 2022-23. In the second half of 2022-23, monetary policy has, in my view, become complacent about growth, and I fervently hope that we do not pay the price for this in terms of unacceptably low growth in 2023-24," Varma said in the minutes of MPC's February meeting.

Varma, who is a professor at the Indian Institute of Management, Ahmedabad (IIM-A), said that the 25 basis point rate hike approved by the majority of the MPC is not warranted in the current context of diminished inflationary expectations and heightened growth concerns.

Varma, along with MPC member Ashima Goyal, had voted against the repo rate hike. The duo also voted against the resolution to remain focused on "withdrawal of accommodation".

"Turning to the stance, I believe that a repo rate of 6.50% very likely overshoots the policy rate needed to achieve price stability, and further tightening is not desirable. I therefore vote against this resolution also," Varma said at the MPC meeting earlier this month.

MPC members Shashanka Bhide, Rajiv Ranjan, Michael Debabrata Patra and RBI governor Shaktikanta Das voted to increase the policy repo rate by 25 basis points. They also voted to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

According to Goyal, excessive front-loading of rate hikes carries the risk of over-shooting that is best avoided for compelling reasons in the Indian context. "First, raising real policy rates to reduce demand has a stronger effect on growth than it does on inflation. Second, since there are more lags in monetary transmission in India, over-shooting can have persistent deleterious effects here, including instability. Third, macroeconomic stability improves most rapidly if real interest rates are kept smoothly below growth rates and counter external shocks. The Indian economy is well-poised to achieve this combination and to reduce its chronic underemployment," said Goyal, emeritus professor at the Indira Gandhi Institute of Development Research, Mumbai.

"It is better to give time for possible softening of both inflation and growth and effects of past monetary tightening to play out. I am also in favour of a shift to a neutral stance which is consistent with response in any direction as required depending on the impact of global and domestic factors on expected inflation," she said.

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