Interview: MPC's Jayanth Varma hopeful rate hikes thus far will be enough

In his statement in the minutes, Varma too warned that the war against inflation was not over and that it would be premature to say the rate hike cycle had ended. At the same time, the Professor of Finance at Indian Institute of Management, Ahmedabad, cautioned against excessive tightening, which would hurt growth more than necessary.

"Given the fragility of the growth outlook, it is not prudent to administer a precautionary rate hike to deal with an eventuality that might never materialise," Varma said.

Asked to state what would constitute a monetary policy 'pivot' — RBI Governor Shaktikanta Das said on April 6 that the status quo on rates "is a pause, not a pivot" — Varma refused to comment.

"The 'pivot' phrase is not in the MPC statement and so I would not like to comment on it. I would only say that from the perspective of the MPC, this is not the end of the tightening cycle," he said.

Risks on the horizon

Varma sees rising crude oil prices following the April 2 decision by OPEC -plus countries to cut oil output and a deficient monsoon as key upside risks to inflation. Both these risks could warrant monetary policy action, he said in the minutes of the April 3-6 meeting, later telling Moneycontrol that the government could not be expected to single-handedly deal with the supply-side shocks, should they become reality.

"Inflationary shocks of this magnitude would, in my view, require coordinated fiscal and monetary responses. It would not be appropriate to put all the responsibility on the government to deal with such a situation," he said.

While there may be risks, headline retail inflation has fallen sharply since the MPC's April 6 decision. Data released on April 12 by the statistics ministry showed that Consumer Price Index (CPI) inflation crashed to a 15-month low of 5.66 percent in March, thanks to a favourable base effect. Economists see inflation falling even further in April, to under 5 percent.

This sharp fall in inflation, however, does not enthuse Varma.

"Inflation was projected to fall in the first quarter of 2023-24, and so this outcome does not change my assessment which is focused on inflation projections 3-4 quarters ahead. It is at this time frame that I feel that risks are aggravated," he said.

The RBI expects CPI inflation to average 5.2 percent in 2023-24, with the quarterly forecasts ranging from 5.1 percent to 5.4 percent.

On the growth front, Varma's fears about the fragile nature of India's recovery are well known. In the minutes, he noted that early indications of a possible slowdown were now more visible than they were in February, with the other two external members also expressing some concerns regarding India's growth prospects.

The RBI's representatives on the MPC, meanwhile, are more optimistic, with the central bank having forecast that the Indian economy will grow by 6.5 percent in 2023-24.

"I am not fixated on a specific growth number of 6 percent or 6.5 percent," Varma said. "My worry is more about the risks and uncertainties associated with the forecast. There are significant headwinds to growth, both domestic and global, and these require the MPC to be cautious about overshooting the terminal policy rate," he said.

Disagreements within the room

While the MPC is evenly split when it comes to assessing India's growth situation, Varma was the only one to disagree with the policy stance.

Varma has repeatedly disagreed with the committee's use of the phrase 'withdrawal of accommodation' to describe its stance, telling Moneycontrol that he found the stance in both February and April to be "unclear and bereft of substantive content".

The language of the stance was slightly altered in April, going from from "focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward" in February to "remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target."

Varma said his own preferred stance would be "heightened alertness in the face of emerging inflationary risks".

Despite the disagreement, Varma is happy that the MPC allows such issues to be debated publicly debated "instead of being swept under the carpet or buried under anodyne verbiage."

While Varma is not pleased by the MPC's stance and the use of different definitions for the real interest rate, he rejected any comparisons between the MPC's communication and the 'mumble with great incoherence' strategy of former US Federal Reserve Chair Alan Greenspan.

"Incoherent mumbling as a model for central banking has been obsolete ever since the Global Financial Crisis more than 15 years ago. But incoherence is different from disagreement within the MPC. It is possible for two MPC members to be individually highly coherent and still be in fundamental disagreement. That in my view is quite healthy and prevents destructive groupthink," Varma said.