Don’t favour rate hikes at this point… tightening since last year still working: Jayanth R Varma

Was the July CPI (consumer price index) inflation print higher than your expectation? Is the weak monsoon in August a cause for worry?

I was expecting headline inflation in the range of 7-8 per cent for a couple of months and so the actual print did not surprise me. It appears to me that we are witnessing large differences in rainfall across time and across regions, but the overall level of the monsoon does not appear to be seriously deficient. We have to keep our fingers crossed till the season is over to make an assessment of what the situation will turn out to be

You had said inflation reading is going to be above the tolerance band for a couple of months. How long will inflation print remain above 6%? Do you think inflation risks are becoming dominant again?

Inflation spikes driven by volatile vegetable prices tend to last only a few months when monetary policy is conducted appropriately. It is in the nature of volatile prices to spike down as quickly as they spiked up. What we need to ensure is that this transient spike does not have lasting effects.

I believe that inflation expectations are well anchored and that monetary policy is now restrictive enough to ensure that food price spikes do not lead to generalised inflation.

Is the current repo rate level high enough to bring inflation back to the sub-6% level and glide it to the 4% target? Will a rate hike at this juncture help ease inflationary pressures?

The tightening effected since May last year is still working its way through the system and this is expected to maintain downward pressure on inflation over the next several quarters and bring it close to the band. While there is a great urgency to bring inflation within the tolerance band, it would not be appropriate to impose a very high growth sacrifice to hasten the glide path from there to the middle of the band. Therefore, I do not favour rate hikes at this point of time.

Do you think more needs to be done on the supply side to rein in inflation?

Coordination between monetary and fiscal policy has been excellent in the entire post-pandemic period. Monetary and fiscal policy act in complementary fashion in this kind of situation. Supply-side measures act quickly and protect the most vulnerable sections of the society while monetary policy acts over longer time horizons to ensure that supply shocks lead to changes only in relative prices and not in the general price level.

When do you expect rural growth and consumption to pick up? Won’t high inflation and interest rates affect rural demand and overall growth?

I do see the monsoon risk as being potentially as much of a demand shock as a supply shock. Hence, it is important to monitor the rural demand situation closely in the coming months.

RBI has mandated banks with maintaining an incremental cash reserve ratio. What is your view on it?

Liquidity management does not lie within the purview of the MPC as it is merely a part of the operational toolkit for implementing monetary policy. I would not like to comment on this.

What impact could the slowdown in China have on India’s growth?

Indian imports from China significantly exceed its exports to that country. When it comes to external demand, North America and Europe are more important for India, and recessionary risks in those regions are a bigger source of worry.