Exclusive | Mine has been a lone voice in MPC, but I have never felt lonely: Jayanth Varma

Jayanth R Varma

Ever since he joined the Monetary Policy Committee (MPC), Jayanth R Varma has been a lone voice in the panel.

Varma has long argued against the continuation of the so-called 'accommodative' stance and has challenged the notion that monetary policy can effectively counter the ill-effects of the pandemic.

More than once, during MPC meetings, Varma has dissented on the continuation of the accommodative stance, saying the panel's communication needs to be precise, else the MPC is risking its credibility.

In a freewheeling chat with Moneycontrol on May 19, Varma spoke on a range of issues, including the hurried, unscheduled rate hike on May 4.

Edited excerpts:

What was the real urgency of an off-cycle meeting? Couldn't it have been in April or June?

Varma: As I have written in my statement, off-cycle meetings are the prerogative of the Governor. The other MPC members can confine their analysis to the action to be taken, given that a meeting has been called. The action in April was more or less precluded by the February guidance (which I dissented from at that time), and there is a lot of catching up to do, and the sooner we start hiking rates the better.

Why 40 bps? Never understood the math!

Varma: Nor do I! The only reason why I went along with this number was that I did not consider it materially different from 50.

Was there a communication from the government to do this?

Varma: There was no such communication to me and I am not aware of any communication to anybody else.

When were MPC members informed about the meeting?

Varma: Adequate notice was given, and there can be no complaint whatsoever on this score.

Do you believe that the MPC could have acted in advance?

Varma: I have written in my statement that the MPC maintained its forward guidance for far too long after the pandemic abated, and this most probably delayed the rate action from April to May.

Now inflation seems to be going out of control…

Varma: I would not agree with the phrase “out of control”. I believe that a decisive rate action can subdue the unpleasant inflationary episode that we are witnessing currently, and bring inflation down to target.

Shouldn’t we be more effective in communication on stances and guidance? Why this complicated approach?

Varma: I have written in my statement that the communication is technically correct in the sense that a policy rate below the neutral interest rate is accommodative, but I agree that if the analysts find the language confusing, the MPC should not hesitate to change it.

You said that a 100 bps hike is warranted. According to you, by when should this happen?

Varma: I do not think it is sensible to be more precise than the phrase “very soon” that I have used.

How effective are rate hikes to counter supply-driven inflation?

Varma: Theoretically, supply shocks should only cause a shift in relative prices and not in general price levels. The pandemic led to a shortage of goods and an excess capacity in services. A change in relative prices (goods becoming more expensive while services become cheaper) would reorient demand from goods to services. This would bring the much-needed relief to contact-intensive services.

An inflation-targeting central bank should try to engineer such a non- inflationary change in relative prices, and, in my view, the monetary policy is capable of delivering this benign outcome.

You are a lonely voice in the MPC with respect to stance, language and guidance. What is the feedback from other experts, and MPC members on your dissent?

Varma: First of all, I would distinguish being lone and lonely. While mine has been a lone voice, I have never felt lonely. There is a great deal of constructive discussion that happens within the MPC and outside. I have found this intellectually stimulating and enriching.

You have been arguing against the accommodative stance for long, but you didn’t do it this time. Why?

Varma: Both in April and May, there was no stance to dissent from. That a hugely negative real policy rate is accommodative is simply a statement of fact. However, as I explained above, if people find the language confusing, the MPC must be prepared to change it.