‘To minimise growth risk, need a gentle glide path to middle of inflation target’

Jayanth R Varma, one of the external members of the Monetary Policy Committee (MPC), tells Hitesh Vyas that the policy needs fine-tuning to ensure that the real rate does not rise above the optimal level. Varma, who expressed his reservations on the ‘withdrawal of accommodation’ stance in the June policy, feels the stance does not reflect the MPC’s current or future actions. Excerpts:

You have said current monetary policy levels can inflict significant damage to the economy. Can you explain?

Monetary policy seeks to control inflation with as little growth sacrifice as possible. The current real repo rate is close to 1.5 per cent based on projected inflation 3-4 quarters ahead. At this level, there are worries about the extent of demand destruction that it will cause and the consequent damage to economic growth. There is, therefore, a need for fine-tuning the policy in light of how inflation and growth unfold in ensuing quarters to ensure that the real rate does not rise above the optimal level.

Why do you feel the policy stance is increasingly getting disconnected from reality?

When the MPC keeps rates unchanged for two meetings while insisting all along that it is focused on withdrawal of accommodation, it appears to me that the stance does not mean what it appears to mean. Increasingly, the stance no longer reflects either what the MPC is actually doing or it is likely to do. It has become harmless verbiage completely disconnected from reality.

When do you see inflation touching the 4 per cent level?

While there was urgency in bringing inflation within the tolerance band, the glide path to the middle of the target can and should be more gentle to minimise the growth sacrifice. I think it would take more than a year for this to happen.