50 bps rate cut needed soon as downward trend in inflation clearer, more robust, says MPC member Jayanth Varma

Jayanth Varma Professor IIM-A

A 50 basis points (bps) rate cut by the Reserve Bank of India (RBI) is needed soon as the downward trend in the inflation is clearer and more robust, Jayanth Varma, one of the three external members of the Monetary Policy Committee (MPC),  said in an interview with Moneycontrol on August 23.

“I have been voting for a 25 basis point rate cut for six months now. But the second cut would be dependent on the inflation trend remaining benign,” Varma said.

India’s consumer price index (CPI) inflation is on the downward trajectory since the last few months, due to favourable base effect, and contraction in inflation of certain items.

India’s inflation declined to a 59-month low of 3.5 percent in July compared with 5.1 percent in the previous quarter, as a favourable base helped contain pressures, according to data released on August 12.

Consumer inflation had touched 7.4 percent in July 2023. Core inflation rose to 3.4 percent in July compared with 3.1 percent.

Edited excerpts:

You mentioned that RBI’s surveys show multiple early warning signals that growth may be already slowing down, how much slow down can we expect than projections?

At the moment, these are just early warning signals that remind us of the downside risks to growth. It is premature at this point to translate this into a precise revision to the growth forecast. In any case, even the projected growth rate without any revision is well below the potential growth rate.

You said 50 bps cut is needed in short span of time, so this should happen in this calendar year or this financial year and why?

I voted for a cut of 25 basis points in the August meeting itself. The subsequent cut would be based on the inflation and growth outcomes over the next couple of months.

Earlier you are batting for 25 bps cut, but now you are focusing on 50 bps cut, why have your views have changed between June and August monetary policy?

I have been voting for a 25 basis point rate cut for six months now. During these six months, the downward trend of inflation has become clearer and more robust. This makes me think that a 50 basis point cut will be needed soon. But the second cut would be dependent on the inflation trend remaining benign.

Do you think, considering the growth surpassing 7 percent mark from last three years, is there a excess demand in the system, which could pose risk to inflation going ahead even though the trend line is downward?

It is important to look at the cumulative compound growth rate from the pre-pandemic period. That would show that there is a lot of catch up still required to return to the pre-pandemic trend line. I do not see any evidence of excess demand or overheating in the economy.

You have said about rate cut, but what about monetary policy stance, when can we expect change from ‘Withdrawal of Accomodation’ to ‘Neutral’?

In this meeting, as in the previous couple of meetings, I also voted to change the stance to neutral.

Will RBI follow the US Federal Reserve, if they reduce rate in the September policy?

I think India has sufficient monetary autonomy to formulate its monetary policy based on domestic macroeconomic considerations. India’s current account deficit is quite modest, and we do not need to worry about financing this deficit even if the interest rate differential is reduced.

How do you see CPI Index if food weightage is lower from index, what challenges will it have and correct it will be to say CPI print with less food weight?
The MPC has a statutory mandate set by the government, and our task is to conform to that target, which happens to be headline CPI inflation. As an MPC member, I do not wish to comment on changing the benchmark. It is up to the government to modify the target if it considers it desirable to do so.