7% is not an adequate growth rate… India ought to be growing more rapidly because of the demographic dividend: Jayanth R Varma

What is your assessment on India’s growth in FY2025? Do you think 7% growth is achievable?

I think the projected growth rate of 7% is achievable though many professional forecasters expect a somewhat lower rate. The more important point is that 7% is not an adequate growth rate at this juncture where we are still well below the pre-pandemic trend line. This is also the period where India ought to be growing more rapidly because of the ongoing demographic dividend.

What are the major risks to inflation and growth projections for FY2025?

Geopolitical tensions, weather related uncertainties and the global environment are the major risks for the Indian economy during this financial year. As the MPC statement says, the risks are evenly balanced.

Do you expect food price pressures to ease and the disinflation process to accelerate in FY25 considering that monsoon is expected to be good this year?

The good news in 2023-24 was that food price shocks tended to be transient, and I expect the same transience this year as well. A favourable monsoon this year should reduce the severity and frequency of these transient shocks. All these factors make me confident that inflation is firmly on a path of gliding towards the target.

You mentioned that a high real rate imposes significant costs on the economy. Can you elaborate? Is it already happening?

The economy has been held up by government investment, and the ongoing process of fiscal consolidation is gradually withdrawing that stimulus. It is necessary for private capital investment to pick up the baton, but we have been waiting for many quarters now for this to happen. Monetary policy should be wary of keeping rate so tight that it prevents a revival of private sector capital investment.

You voted for a neutral stance on withdrawal of accommodation. How will it help in aligning inflation progressively to the target?

In my view, a real interest rate of 1-1.5% would be sufficient to glide inflation to the target of 4%. The current real policy rate of 2% (based on projected inflation for 2024-25) is therefore excessive. Moreover, as inflation continues to fall, a progressive reduction in the nominal policy rate is necessary to prevent an unwarranted increase in the real policy rate.

Do you see rate cuts to begin this fiscal? CPI inflation is expected to be below 4 per cent in the second quarter? There are some expectations that RBI may start cutting rates from the second quarter of FY25.

I cannot forecast how the rest of the MPC will evolve in the coming months. My own view has been in favour of a rate cut for two meetings now.

Can global risks delay the rate easing cycle in India?

The risks are definitely there. The geopolitical situation is very volatile and miscalculations by various players could still lead to very unpleasant outcomes. All that I am saying is that this is not the base case for projections at this point of time.

Do you think monetary policy decisions of other major central banks influence the RBI decisions?

I think the macroeconomic environment in India is very different from that of many advanced economies. In particular, there is no evidence in India of the kind of overheating that is raising concerns in the US. India today has enough monetary autonomy to set monetary policy on the basis of domestic considerations without having to emulate US policy.

Do you think the recent escalation of tensions in the Middle East and rise in crude oil prices can pose a significant threat to the price stability?

Actually, the geopolitical situation looks less scary today than at the time of the meeting. Crude futures prices have shown a very muted market reaction to the Israel-Iran conflict. We do not know how the situation would evolve in the coming weeks, but as of now, the situation is not worrisome.

The US 10-year treasury yield has crossed 4.6%. What will be the impact on India?

The primary impact of this is on the exchange rate, and the US Dollar Index has trended up in recent days reflecting an appreciation of the dollar against major world currencies. However, the mandate of the MPC does not include the exchange rate, and we have to set rates taking account only the domestic macroeconomic environment in terms of inflation and growth.

What’s going on in the rural sector? Demand has not picked up to the desired level despite high GDP growth of 7% plus.

I have been pointing out for some time now that we must not lose sight of the low cumulative growth rate since the pre-pandemic period. This implies that there is a lot of catchup growth that is required to restore the economy to the pre-pandemic trend line.