Interview | I think there are substantial risks to both the growth and inflation outlook: MPC member Jayanth Varma

Jayanth Varma, a member of the MPC, said he is worried about external risks to the economy

In the minutes of the monetary policy committee (MPC) meeting released on August 24, member Jayanth Varma reiterated his reservations on the policy stance, terming it ’harmless ritualism’. Varma argued that the sharp disconnect between the stance and action has completely nullified the importance of the stance.

In the latest meeting, the MPC kept the repo rate—the rate at which the RBI lends short-term funds to banks—unchanged at 6.5 percent and said future actions will depend on incoming data.

Subsequently, in an exclusive interaction with Moneycontrol, Varma said there are substantial risks to both the growth and inflation outlooks. Also, Varma said he worries about the external environment, which continues to be the single biggest risk to the economy.

Edited excerpts:

How worrying is the inflation situation? What is the long-term solution for the food price inflation spike?

I expect the current inflation spike to last only a few months as it is driven by volatile vegetable prices. Monetary policy is now restrictive enough to ensure that food price spikes do not lead to generalised inflation. The longer-term solution to food price volatility is a vastly expanded cold storage capacity and a stronger food processing industry that allows surpluses to be carried over to a deficient harvest.

You said the current level of the repo rate is high enough to bring inflation below the upper tolerance band. Could you explain?

The tightening that has been effected since May last year is still working its way through the system and this is expected to maintain downward pressure on core inflation over the next several quarters. The declining core inflation will also feed into a reduction in headline inflation over a period of time.

Also Read: MPC Minutes: Members caution about near-term pick up in inflation

When do you expect the rate cuts to happen—is the end of the year a fair expectation? Are prolonged higher rates a threat to the nascent economic recovery?

Rate cuts would be possible when the real interest rate on the basis of projected inflation 3-4 quarters ahead becomes excessive. Inflation falling into the tolerance band is not by itself sufficient for this.

There are concerns arising out of the global economy (China property crisis/ economic slowdown, US economic woes etc). Do you foresee a recession in the near term?

I do worry a lot about the external environment, which I think is the single biggest risk to the growth outlook. We should therefore continue to monitor growth outcomes carefully over the next few months.

Also Read | MPC Minutes: Liquidity overhang pose direct threat to inflation aim, financial stability, says DG Patra

What is your outlook for the Indian Rupee? Will a weaker Rupee add to inflationary pressure in the near term?

The volatility in the rupee-dollar exchange rate in the last year or so has had more to do with cycles of dollar strength and weakness than to the rupee itself. In the past I have stated that a strong dollar typically leads to a decline in commodity prices and that therefore the rupee price of crude oil and other commodities is not as sensitive to the exchange rate as one might think. So, I do not worry too much about this.

What are your readings from the recent RBI surveys reflecting elevated household inflation expectations and lower consumer confidence? Are the GDP growth projections of the RBI realistic?

I do think there are substantial risks to both the growth and inflation outlook.

With respect to stance, you continued to express reservations and called it a ‘harmless ritual’. Is it time for the MPC to do away with the practice itself?

I would be delighted if the MPC decides to do away with the stance completely.

Do you feel that there was a premature victory celebration over inflation?

I have said so explicitly in my statement both in June and in August.

What are the primary risks for the Indian economy for the rest of the year?

I have already mentioned the external sector as a major source of risk. I would also point out that any deficiency in the monsoon would be as much a demand shock as it is a supply shock. We should therefore continue to monitor growth outcomes carefully over the next few months.