Extended accommodative stance weakens the credibility of MPC’s inflation-fighting credentials: Jayanth Varma

Jayanth Varma (Image credit: https://faculty.iima.ac.in/~jrvarma/)

Jayanth Varma is the only member of the monetary policy committee (MPC) who has been opposing the continuance of the so-called accommodative stance.

In the last round of the MPC meeting in February too, Varma strongly argued that it is time for the rate-setting panel to switch to ‘neutral’.

That apart, Varma warned that the rate-setting panel's continued focus on pandemic-fight has become counterproductive and deflects the focus of the MPC away from the core issue of addressing the recessionary trends that go back at least to 2019.

In an exclusive interview with Moneycontrol on March 4, Varma shares his views on the dangers of extending the ‘accommodative stance’, inflationary threats, among other things.

Edited excerpts:

You have been arguing against the continuation of the ‘accommodative’ stance for long. Do you think your arguments aren’t given due importance?

Not at all. The MPC members hear me patiently and take my point of view seriously. I have no complaints on that score. In my view, the whole point of several independent external members in the MPC is to encourage diversity of views and avoid group-think. Both Indian and global experiences suggest that having one person dissenting for several meetings in succession is not uncommon.

What are the dangers of extending the ‘accommodative stance’ at this point?

First, the accommodative stance limits the freedom of the MPC to act rapidly in the future. In a situation of high uncertainty and fast-paced developments, the MPC must, in my view, be prepared to move swiftly in either direction if the situation so warrants. Second, an extended accommodative stance weakens the credibility of the MPC’s inflation-fighting credentials by giving a possibly mistaken impression that the MPC is not sufficiently concerned about inflation. If credibility is diminished, then the MPC might have to take more drastic and painful measures to have the desired impact on inflation.

Are inflationary threats being undermined by the MPC in its bid to fight the pandemic and support growth?

In my perception, the majority of the MPC is not tolerating inflation to fight growth. Rather, they are taking the view that inflation is transient and does not merit strong monetary action. My view is that there is a great deal of uncertainty about this, and it is hard to forecast how inflation will evolve in the coming months. I am comfortable with a wait-and-watch attitude, but that must be coupled with the willingness to act promptly if inflation outcomes do not conform to benign expectations.

How big a threat is supply-driven retail inflation to the bottom of the pyramid?

Inflationary pressures are present even in essential goods and services consumed by the poor, and therefore it is a matter of concern to them as well.

Do you think the digital rupee can pose risks in the economy?

I would not want to comment on this at this stage.