‘7% is not an adequate growth rate as India is well below pre-pandemic level’

JAYANTH R VARMA, one of the external members of the Reserve Bank of India's Monetary Policy Committee (MPC), believes that food price shocks, which were transient in the previous fiscal, are expected to be short-lived in FY2025 as well. And, Inflation is ‘firmly’ on a path of gliding towards the 4 per cent target, he says. Varma, who has been voting for a 25 basis points (bps) cut in the repo rate for the previous two meetings, told HITESH VYAS and GEORGE MATHEW that the monetary policy should be wary of keeping the interest rate so high that it prevents revival of private sector capital investment.

The projected GDP growth of 7% for FY2025 is achievable but it is not an adequate rate as the country is well below the pre-pandemic level, said Varma, who is Professor of Finance in IIM Ahmedabad. Edited excerpts:

What is your assessment on India’s growth in FY2025? Do you think 7 per cent growth is achievable?

I think the projected growth rate of 7 per cent is achievable though many professional forecasters expect a somewhat lower rate. The more important point is that 7 per cent is not an adequate growth rate at this juncture where we are still well below the pre-pandemic trend line. This is also the period where India ought to be growing more rapidly because of the ongoing demographic dividend.

What are the major risks to inflation and growth projections for FY2025?

Geopolitical tensions, weather related uncertainties and the global environment are the major risks for the Indian economy during this financial year. As the MPC statement says, the risks are evenly balanced.

Do you expect food price pressures to ease and the disinflation process to accelerate in FY25

INTERVIEW WITH

JAYANTH R VARMA considering that monsoon is expected to be good this year?

The good news in 2023-24 was that food price shocks tended to be transient, and I expect the same transience this year as well. A favourable monsoon this year should reduce the severity and frequency of these transient shocks. All these factors make me confident that inflation is firmly on a path of gliding towards the target.

You mentioned that a high real rate imposes significant costs on the economy. Can you elaborate? Is it already happening?

The economy has been held up by government investment, and the ongoing process of fiscal consolidation is gradually withdrawing that stimulus. It is necessary for private capital investment to pick up the baton, but we have been waiting for many quarters now for this to happen. Monetary policy should be wary of keeping rate so tight that it prevents a revival of private sector capital investment.

You voted for a neutral stance on withdrawal of accommodation. How will it help in aligning inflation progressively to the target?

In my view, a real interest rate of 1-1.5 per cent would be sufficient to glide inflation to the target of 4 per cent. The current real policy rate of 2 per cent (based on projected inflation for 2024-25) is therefore excessive. Moreover, as inflation continues to fall, a progressive reduction in the nominal policy rate is necessary to prevent an unwarranted increase in the real policy rate.

Do you see rate cuts to begin this fiscal? CPI inflation is expected to be below 4 per cent in the second quarter? There are some expectations that RBI may start cutting rates from the second quarter of FY25.

I cannot forecast how the rest of the MPC will evolve in the coming months. My own view has been in favour of a rate cut for two meetings now.

Can global risks delay the rate easing cycle in India?

The risks are definitely there. The geopolitical situation is very volatile and miscalculations by various players could still lead to very unpleasant outcomes. All that I am saying is that this is not the base case for projections at this point of time.

Do you think monetary policy decisions of other major central banks influence the RBI decisions?

I think the macroeconomic environment in India is very different from that of many advanced economies. In particular, there is no evidence in India of the kind of overheating that is raising concerns in the US. India today has enough monetary autonomy to set monetary policy on the basis of domestic considerations without having to emulate US policy.