JAYANTH VARMA, a member of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), who opposed the dovish policy stance of the RBI, said on Thursday that “the stance carries with it the risk of falling behind in the future because the position limits the freedom of action of the MPC in subsequent meetings”. In a conversation with GEORGE MATHIEU, Varma, Professor of Finance and Accounting, IIM Ahmedabad, said: “We must have our hands on the trigger, ready to act if the need arises…and policy makers must recognize that the reality may not be. unfold according to their expectations. Excerpts:
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The situation changed after the last monetary policy review in February. How serious is the inflationary threat given that crude oil prices have soared, commodity prices are expected to remain high, and many countries have imposed sanctions on Russia?
I think the situation in Ukraine is a threat to both growth and inflation. If you insisted on the inflationary shock, the growth shock should not be ignored. Some Western European countries could actually tip into recession, and India could also face headwinds, especially (but not only) in terms of exports. We don’t know how long these two shocks will last and how severe they will be.
What will be the impact of the Russian invasion of Ukraine on the Indian economy? If the conflict continues, what will be the impact?
I don’t have a crystal ball and I strongly believe that policy makers shouldn’t pretend they have a crystal ball. Monetary policymakers must (a) proceed with humility, (b) recognize that reality may not unfold according to their expectations, and (c) be prepared to adapt quickly to changing conditions. Above all, they must avoid making commitments that restrict their future freedom of action.
Do you think the RBI’s policy of focusing 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 control inflation?
I repeat that I consider the current level of the policy rate to be appropriate given the twin challenges of below-average economic growth and above-target inflation. I think the MPC should do more to communicate its determination to defend the inflation target and its willingness to raise rates as needed.
Do you think the RBI has lagged behind in its policy actions, especially on the inflation front?
No. My concern is that the dovish stance carries the risk of falling behind in the future because the stance limits the MPC’s freedom of action in subsequent meetings.
Do you see the possibility of retail price inflation exceeding the 7% level?
This possibility is not new; it is acknowledged in the February MPC meeting minutes. The fan chart (Chart 1 in the policy statement) shows that the 70% confidence interval is at a cry distance of 7%. The breadth of the fan chart was the focus of my dissent at this meeting.
Do you think it is time for the RBI to change its dovish stance and raise key rates such as Repo and Reverse Repo rates to fight inflation? What should the RBI do now?
I have argued in my successive dissents for many months now that a change in the dovish stance is long overdue. At the same time, I don’t think the time is right to increase 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 is justification for the RBI’s Monetary Policy Committee (MPC) to act ahead of the next policy review in April?
It is premature for the MPC to act now. The situation is still fluid. We have to wait and watch the developments in Ukraine.
You argued for decoupling the pandemic from monetary policy, because the issues affecting the economy have nothing to do with the pandemic. What are the issues affecting the economy?
The problem is that the economy has grown too slowly (at least) since 2019. Investments have been weak and private consumption is still lagging, and the economy is mainly supported by fiscal support. There is an urgent need to push the economy onto a path of self-sustaining growth that meets the aspirations of our people. The challenge is that this must be done in the context of excessively high inflation. Moreover, as I argued in my statement to the MPC, geopolitical tensions are now one of the biggest risks to the global economy.