Easy money policyneeds a hard look: MPC member

MPC member Jayanth R Varma advocated a hike in the reverse repo rate

MUMBAI: The Reserve Bank of India’s accommodative policy stance needs a “hard look” as the covid-19 pandemic seems likely to stay longer than anticipated, monetary policy panel member Jayanth R. Varma said in a recent meeting, advocating an increase in the reverse repo rate.

While all six members of the central bank’s rate-setting panel voted in favour of keeping the repo rate unchanged at 4% at its meeting on August 4-6, Varma was the sole dissenter when it came to retaining the accommodative stance. His comments, along with those of other monetary policy committee (MPC) members, were published by RBI on Friday.

Varma said Covid is beginning to look more and more like tuberculosis, which kills a very large number of people every year without inflicting major damage to the economy.

“In other words, it is beginning to resemble a neutron bomb,” he said.

Thus, the ability of the monetary policy, Varma said, to mitigate a human tragedy of this nature is very limited as compared to its ability to contain an

Aeconomic crisis. That apart, he pointed out the lengthening of the time horizon of the pandemic, citing experience, particularly from countries such as Israel, which are seeing rising case counts despite very high levels of vaccination.

“The possibility that Covid-19 will haunt us (though with lower mortality) for the next 3-5 years can no longer be ruled out. Keeping monetary policy highly accommodative for such a long horizon is very different from doing so for what was earlier expected to be a relatively short crisis,” Varma said.

According to Varma, inflationary pressures are beginning to show signs of greater persistence than anticipated earlier, and inflationary expectations may be becoming more entrenched.

“While there is some comfort that inflation is forecast to be below the upper end of the tolerance band, it is important to emphasize that the inflation target for the MPC is 4% and not 6% or even 5%. The tolerance band is designed to allow for forecast errors, implementation shortfalls and measurement issues. Treating 5% as the target would increase the risk of inflation targeting failures,” he said.

Varma said the current level of the reverse repo rate is no longer appropriate, and called for a “gradual normalization” of the width of the policy corridor or the difference between the repo and the reverse repo rate. He argued that while MPC’s mandate is supposed to be restricted to the policy rate or the repo rate, the monetary policy statement contains the line,

“consequently, the reverse repo rate under the LAF remains unchanged at 3.35%”.

“I have for some time now been arguing that if the reverse repo rate does not fall within the remit of the MPC, then the announcement of this rate should be in the governor’s statement and not in the MPC’s statement, but this view has not found favour with the rest of the MPC. Hence, I have no choice but to express my disagreement with the level of the reverse repo rate,” he added.

MPC member Mridul K. Saggar said while policy focus to revive growth on a durable basis needs to continue, it should entail consideration to avoid inflation risks that may emanate when credit demand improves.

This arduous task, Saggar said, needs to be carried without endangering sustainable recovery in growth. He said in order to disallow markets from becoming used to slush liquidity designed only as a temporary measure, it is critical to facilitate unwinding when the time comes.

Meanwhile, governor Shaktikanta Das said managing the economy and the financial markets since the beginning of the pandemic has thrown up challenges, and policies thus have to be carefully nuanced. He said continued policy support with a focus on revival and sustenance of growth is the most desirable and judicious policy option at this moment.