JAYANTH R VARMA, one of the three external members of the Reserve Bank of India's Monetary Policy Committee (MPC), believes that inflation will gradually move towards the 4 per cent target, but it would take several quarters. In an interaction with GEORGE MATHEW and HITESH VYAS, Varma, Professor in the Finance and Accounting at the Indian Institute of Management, Ahmedabad, said that growth in 2024-25 and 2025-26 would be in the ballpark range of around 7 per cent, which is below the potential growth rate of the economy. He said that a reduction in the current excessive real interest rate would help in reviving private capital investment. “Restrictive monetary policy controls inflation by suppressing demand, and until companies see robust demand growth, they may be reluctant to invest despite reasonably high capacity utilisation,” he said. Edited excerpts: Retail inflation has fallen to 3.5 per cent in July. Do you expect inflation to be benign in the coming months? Is the 4 per cent level sacrosanct? I expect inflation to trend down in coming quarters, with transient spikes in between, primarily due to food inflation. As far as the MPC is concerned, the 4 per cent target is a statutory mandate and therefore sacrosanct. I am confident that inflation will gradually glide towards the 4 per cent target, but this process would take several quarters. What’s your opinion on the proposal in the Economic Survey for exclusion of food inflation from CPI inflation? I do not wish to comment on this as an MPC member. The MPC has a statutory mandate set by the government, and our task is to conform to that target. It is up to the government to change the target if it considers it desirable to do so. It would not be appropriate for the MPC to suggest changing the goal post when high food inflation is making it difficult to reach the target. There is a view that since Indian inflation is not well measured, and could be over or under-estimated, too much precision with regard to a target is unproductive. What is your view on this? The tolerance band of 2 per cent on either side of the target takes care of these measurement errors as well as the well-known difficulties in forecasting future inflation and the uncertain lags in the effect of monetary policy. You said a reduction of over 50 basis points in the repo rate is needed within a short span of time. When do you think this should happen? I voted for a cut of 25 basis points in the August meeting itself. The subsequent cut would be based on the inflation and growth outcomes over the next couple of months. There is a view that the US Federal Reserve may cut interest rate in September. Will it have a bearing on MPC’s decision on reducing the repo rate? I think India has sufficient monetary autonomy to formulate its monetary policy based on domestic macroeconomic considerations. India’s current account deficit is quite modest, and can be readily financed even if lower interest rates lead to lower capital inflows into our debt markets. You have mentioned about the unacceptable growth sacrifice induced by a monetary policy that is excessively restrictive. Do you see GDP growth for FY25 to be lower than the projected 7.2 per cent? ICRA has projected growth to fall to 6 per cent in Q1 from 7.8 per cent projected earlier… It is difficult to forecast growth rates to a decimal point of accuracy. My view is that growth in 2024-25 and 2025-26 would be in the ballpark range of around 7 per cent and this is well below the potential growth rate of the economy. What are the three key factors that can help India in achieving the potential growth rate of at least 8 per cent? First, multiple policy measures during the last few years including digitalization, tax reforms, and a step up in infrastructure investment are key enablers of rapid growth. Second, the demographic transition that is under way is bringing a large number of new workers into the labour force, and this also creates the conditions for non-inflationary growth. Third, a reduction in real interest rates can accelerate private sector capital investment and spur growth. India witnessed a transient lull in the investment activity, especially govt capex, in Q1 FY2025. What are the reasons for private capital investment not picking up? A major reason is probably demand uncertainty. Restrictive monetary policy controls inflation by suppressing demand, and until companies see robust demand growth, they may be reluctant to invest despite reasonably high capacity utilization. I remain hopeful that private capital investment will revive, but a reduction in the current excessive real interest rate would help.
