India needs to reduce interest rates in order to help the economy hit its potential growth targets, yet members of the country's monetary policy committee (MPC) are split on the timing of such rate cuts.

"We are in a catch-up growth phase. Growth has to go up in order to create employment and jobs for young people, for the investment cycle to take off, and so on," said Ashima Goyal, one of three external members on the six-member MPC.

"To the extent inflation is within our tolerance band and is approaching target, we have not yet reached potential. That means we can afford to grow at higher rates."

That said, Goyal added that with the current robust economic growth, estimated at 7.6% for 2023/24, and various uncertainties regarding inflation, it would be preferable to maintain stability and thus keep rates unchanged, Reuters reports.

Earlier in April, the MPC held the lending rate steady at 6.5% for the seventh consecutive meeting, after increasing by a total of 250 basis points between May 2022 and February last year

As it stands, the market forecasts rate cuts in early 2025.

In the minutes of the meeting released on Friday, Governor Shaktikanta Das stressed that India's success in disinflation should not divert the MPC from the vulnerability of the inflation trajectory to frequent supply-side shocks.

Additionally, another external MPC member, Jayanth Varma, was the only one to vote in favour of a rate cut for the second consecutive meeting.

"My vote for a rate cut in nominal terms is actually a vote against rising real rates when growth is slackening," Varma told Reuters following the release of the minutes.

"High real rates could also hinder private sector capital investment, which is critical in an environment of fiscal consolidation."

While Goyal agreed that the real neutral rate would remain above 1% if rates were cut, which would keep monetary policy contractionary, she expressed caution regarding the 2000s, when an overheated capital expenditure cycle in the private sector resulted in significant borrowings and a surge in defaults.

"So, we don't want that kind of capex cycle. We want a slow and sustainable cycle and that seems to be happening," Goyal said.

However, Varma argues that a slowdown is already anticipated, given that the forecast growth for 2024/25 is 7%.

"I believe that it would be mere magical thinking to believe that the short-run Phillips curve has been abolished in India and that tight monetary policy does not entail any growth sacrifice," Varma said.

"We have to be conscious of the growth-inflation trade-off and calibrate monetary policy to achieve the inflation target with as little sacrifice as possible."