MPC should match words and actions on policy stance: Varma
Jayanth R. Varma, one of the three external members of the central bank’s monetary policy committee (MPC), has regularly dissented against the majority view to keep the policy repo rate at 6.5% and the stance at “withdrawal of accommodation”.
The April policy was no different. In fact, Varma was quoted in the minutes of the meeting as having said that since his views were largely the same as in the February meeting, he would keep it brief. In an emailed interview a day after the release of the minutes, Varma said the rate-setting panel should be consistent in its messaging and therefore the stance, not backed by an intent to tighten, is unjustified. Edited excerpts:
Given that projected growth rate for 2023-24 is seen as strong, do you still believe that keeping the repo rate high for long would dampen growth? During 2023-24, inflation came down and as a consequence, the real policy rate has crept up. The effect of this monetary tightening during the last few quarters will be felt in coming quarters. Monetary policy has to be forward-looking and cannot be driven by growth and inflation outcomes in the past year.
Could the dip expected in 2024-25 GDP growth be attributed to a staggered impact of high rates or is it just because of a base effect?
The correct way of looking at the base effect is to look at the pre-pandemic trend line of the economy. The very low cumulative growth rate—well below 5% annually—over this horizon means that there is a lot of catch-up growth still required to restore the economy to the pre-pandemic trend line. This longer term base effect should actually be propelling growth at 8% or even higher.
For the last several policies, you have dissented on the stance too. What do you think would be some of the benefits of changing it to neutral?
I believe that words must match actions, and if MPC has
no real intention to raise repo rates—as evidenced by the lack of such an action for over a year now—it is not appropriate to keep repeating a stance that suggests further rate hikes.
What according to you is a sustainable real rate given our growth and inflation projections?
I believe that a real policy rate of 1.0-1.5% is sufficient to glide inflation to the target. The current real rate which is around 2% risks an unwarranted growth sacrifice.
Do you subscribe to the belief that the post-pandemic recovery of the Indian economy has been K-shaped?
That is a debate that is best reserved for another context. My point is that based on headline inflation and GDP (gross domestic product) growth as these are currently measured, there is a case for cutting the nominal policy rate.