Is MPC member Jayanth Varma just a contrarian or ahead of the curve?

This was in the throes of the COVID-19 pandemic, which required unprecedented monetary and fiscal intervention.

Varma went on to record his dissent against the policy stance 11 more times, the latest one at the June policy meeting of 2023.

He termed his last two protests as more of a reservation than a formally recorded dissent. The MPC has had 18 meetings since October 2020. Given his high ratio of dissent, market participants seem to perceive Varma as a constant contrarian voice.

“Varma appears somewhat pathologically contrarian. But he has been right on occasions such as the warnings on inflation (in 2021),” said an economist from a private sector bank requesting anonymity.

Au contraire

To be sure, dissent is not new for the MPC. Ever since India adopted the flexible inflation targeting mandate and a committee-based voting system to decide on policy rates, there have been dissenting members at various points in time.

The MPC is made up of six members, three from the Reserve Bank of India (RBI) and three external members. All members have a four-year term on the committee.

The first MPC was formed in October 2016 and consisted of external members Chetan Ghate, Ravindra Dholakia and Pami Dua, along with the then RBI governor Urjit Patel, deputy governor R Gandhi and executive director Michael Patra.

Ravindra Dholakia, professor of IIM-A, was the first to dissent in June 2018 and went on to vote against policy changes three times. Chetan Ghate, a professor at the Indian Statistical Institute, also dissented three times. Against popular perception that the RBI officials shared the same view, ED Michael Patra, now the deputy governor of the central bank, recorded his dissent twice.

But Varma stands out not only because of the number of times he has dissented but also because most times it was against the policy stance. He has voted against the proposed policy repo rate change only once. To put it simply, Varma’s reservations seemed more towards policy communication rather than policy action.

"Incoherent mumbling as a model for central banking has been obsolete ever since the global financial crisis more than 15 years ago," he said in an interview with Moneycontrol on April 24.

For instance, in the April policy meeting this year, Varma took exception that the policy stance continues to be “withdrawal of accommodation” when no further withdrawal is needed. "I think the stance has become quite meaningless as in my view it no longer guides the actions of the MPC. If the MPC remains on hold for two successive meetings, then it is no longer really focused on withdrawing accommodation,” he wrote in an email response to Moneycontrol.

“The RBI’s withdrawal of accommodation stance doesn’t make sense anymore because the repo rate is already back to pre-pandemic levels and there is nothing to withdraw. Just like Varma, the market too thinks that a neutral stance is overdue,” said a bond trader requesting anonymity.

Back in 2022 as well, at the out-of-turn May policy meet, Varma pointed to a similar problem of the markets not being able to comprehend the MPC’s statements. Despite dropping the word “stance”, market economists continued to interpret the statement of “remain accommodative” as a stance. “It would not be wise for the MPC to persist with language that is pedantically correct but falls short in communicative efficacy,” Varma said.

There is merit in paying attention to policy communication as markets most often sway according to what central bankers say in addition to what central bankers do. Markets tend to price in future policy action by gleaning possible outcomes through the policy stance. Varma’s background in finance and his extensive work and research on financial markets make him an ideal advisor in this regard.

Contrarian or prescient

Markets love contrarians but they seldom act on such calls and hence most contrarian calls see few followings in action. Similarly, dissent and difference of opinion make committee interactions enriching but may not necessarily lead to contrarian actions. Committees go with the majority and the MPC is no different.

However, Varma’s dissent has not been for the sake of sounding contrary. Many times, he has been able to flag upcoming challenges in his dissenting voice. In these instances, the market has found a much-needed voice for its own concerns. “In 2021, he was one of the very few to point out the complacency towards inflation in so many words. We saw what happened in 2021-22 to inflation,” said the bond trader quoted above.

In the February 2022 policy meet, he warned that a shift to a neutral stance was long overdue when the MPC persisted with the accommodative stance. Indeed, the dissent follows his argument six months before in August 2021 that the stance needs to be changed or the MPC risks missing its inflation target of 4 percent.

The MPC changed its stance at the April 2022 meeting to withdrawal of accommodation, but, by then, retail inflation had surged to 7 percent and showed signs of greater persistence, just as Varma had warned.

Retail inflation stayed above the upper end of the 2-6 percent band for 10 months, causing discomfort to the RBI. Fast forward to the February 2023 meeting, where Varma said that the MPC has become complacent about growth and that the 6.5 percent repo rate “overshoots the policy rate needed to achieve price stability.”

“Growth has held up so far, but I am concerned about the prospects for the second half of this financial year. The external environment continues to be challenging, and sectors like IT services that seemed to be immune to the slowing of the advanced economies are now feeling the pinch. I fear that even now, long after the pandemic, economic growth in India continues to be too dependent on government spending, and this is a source of fragility,” he said in his email response.

The jury is still out on whether the FY24 gross domestic product growth would be slower than anticipated. The RBI projects GDP growth at 6.5 percent but some economists still believe that GDP growth could be lower.

Whether Varma’s contrarian views are prescient as well remains to be seen. That said, market participants seem to appreciate the lens of financial markets through which they are conveyed.