JAYANTH VARMA, Member of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), who has been opposing the RBI’s accommodative policy stance, on Thursday said the “stance carries with it the risk of falling behind the curve in future because the stance limits the MPC’s freedom of action in ensuing meetings”. In a conversation with GEORGE MATHEW, Varma, Professor of finance and accounting, IIM Ahmedabad, said, “We should have our hands on the trigger, ready to act if the need arises… and policymakers must recognize that reality may not unfold according to their expectations.” Excerpts:
The situation has changed after the last monetary policy review in February. How serious is the inflation threat considering the fact that crude oil prices have shot up, commodity prices are expected to remain high and many nations have imposed sanctions on Russia?
My view is that the Ukraine situation is a threat to both growth and inflation. While you have emphasized the inflation shock, the growth shock should not be ignored. Some countries in Western Europe might actually tip into recession, and India too could face headwinds particularly (but not only) in terms of exports. We do not know how long lasting and how severe these two shocks would be.
What will be the impact of Russian invasion of Ukraine on the Indian economy? If the conflict gets prolonged, what will be the impact?
I do not have a crystal ball, and I strongly believe that policy makers should not pretend that they have a crystal ball. Monetary policy makers must (a) proceed with humility, (b) recognize that reality may not unfold according to their expectations, and (c) stand ready to adapt rapidly to the changing conditions. Above all, they should avoid making commitments that restrict their freedom of future action.
Do you think the RBI’s policy of focussing on growth and low interest rates will boomerang at a later stage in the wake of the latest global developments? Do you think the central bank is not doing enough to check inflation?
I reiterate that I regard the current level of the policy rate as appropriate given the twin challenges of sub-par economic growth and above target inflation. I think the MPC should do more to communicate its resolve to defend the inflation target, and its willingness to raise rates as and when required.
Do you think the RBI has fallen behind the curve in its policy actions, especially on the inflation front?
No. My concern is that the accommodative stance carries with it the risk of falling behind the curve in future because the stance limits the MPC’s freedom of action in ensuing meetings.
Do you see the possibility of retail inflation breaching the 7 per cent level?
This possibility is nothing new; it is recognized in the minutes of the February MPC meeting. The fan chart (Chart 1 in the policy statement) shows that the 70% confidence interval is within shouting distance of 7%. The width of the fan chart was the focus of my dissent in that meeting.
Do you think it’s time for the RBI to change the accommodative stance and hike policy rates like Repo and Reverse repo rates to tackle inflation? What should the RBI do now?
I have argued in my successive dissents for many months now that a change in the accommodative stance is long overdue. At the same time, I do not think the time has come to raise the repo rate. My position is not that we should pull the trigger now, but that we should have our hands on the trigger, ready to act if the need arises.
Do you think there’s a case for the RBI’s monetary policy committee (MPC) to act before the next policy review in April?
It’s premature for the MPC to act now. The situation is still fluid. We have to wait and watch the developments in Ukraine.
You have argued for delinking pandemic from the monetary policy as the problems impacting economy have nothing to do with the pandemic. What are the problems affecting the economy?
The problem is that the economy has been growing too slowly (at least) since 2019. Investment has been low, and private consumption is still lagging behind, and the economy is being bolstered primarily by fiscal support. There is an urgent need to push the economy onto the path of self-sustaining growth that would meet the aspirations of our people. The challenge is that this has to be done in the context of undesirably high inflation. Also, as I argued in my MPC statement, geopolitical tensions are now one of the biggest risks to the global economy.