MC Exclusive Interview | When people disagree with me, that does not mean that they do not take me seriously: MPC member Jayanth Varma

Do you think interest rates have peaked in India and, if yes, when can one expect a reversal in policy rates in your opinion?

Yes, I do think that interest rates have peaked in India. I have made it clear in my statement that nominal rates will have to be cut soon to prevent an excessive rise in real interest rates as inflation trends downward. However, after three years of excessive inflation, there is an understandable reluctance to act without firmer evidence that inflation is coming down on a sustainable basis.

What are the primary risk factors to growth in the Indian economy at this point and what needs to be done?

The global slowdown and geopolitical uncertainty are, in my view, the biggest risks to growth. Monetary policy should strive not to allow high real interest rates to aggravate these risks.

You have been the sole MPC member who has continuously voted against the continuation of the policy stance of withdrawal from accommodation. But, even without stating it officially, don’t you think MPC has shifted to a ‘neutral’ stance? It has kept the rates unchanged in the last 5 policy meetings. How is the official shift in stance important?

I have argued in the past that the MPC is a statutory body whose statements must communicate in plain language to the general public. It is not enough that smart people can figure out what the MPC says, or that it does not mean what it says. It is not enough that insiders can fathom the coded language in which it chooses to speak. It is imperative that the MPC choose language that intelligent laypersons can interpret. In my view, the MPC has failed this test repeatedly.

The IMF recently observed that MPC’s current policy stance is effective in bringing down inflation to the target. Interestingly, the IMF described the MPC’s policy stance as ‘neutral’ whereas in reality, it is not. Do you agree with this assessment?

The neutral rate of interest is hard to estimate accurately but it is probably around 1 percent. The current real interest rate (based on projected inflation and money market rates close to the MSF) is around 2 percent. Even allowing for the uncertainty in the estimate of the neutral rate, I think the current interest rate is clearly restrictive.

IMF also cautioned India on fiscal consolidation. The fund said India needs to do more and needs an “ambitious fiscal consolidation path” to rebuild its buffers and reduce debt in a sustainable manner. Your comments?

The MPC should, in my view, avoid commenting on fiscal policy in order to preserve its independence in monetary policy. It should, of course, take the announced fiscal policy into account while framing monetary policy. India has been on the path of fiscal consolidation in the post Covid period, and this has to be partially offset by monetary policy to avoid adverse growth outcomes.

Do you think RBI is helpless in prodding banks for effective monetary policy transmission?

While there are lags in the process, I think there is a reasonably effective monetary policy transmission in India. Moreover, the marginal principle in economics implies that for most purposes, the rate of interest on fresh advances and deposits is more important than the average rate on outstanding balances.

Do you think the bi-monthly meetings are too frequent considering the availability of very few data points in the 2-month interval? Should we go back to quarterly meetings?

We live in a global world, and there is a large amount of data about the global economy that comes in on a virtually continuous basis. Financial markets also provide forward looking information on a continuous basis. So there is a mass of data to digest at each meeting. It might well happen that the incoming data is broadly in line with previous expectations and so there is no need to change course. In short, we do need frequent meetings, but many of those meetings might not result in any change in policy rates or stance.

On a personal level, what are your key learnings as an MPC member so far with respect to the policymaking process? Do you feel that your views are not taken with the desired seriousness?

It has been an incredibly satisfying experience and also a wonderful learning experience. I also believe that when people disagree with me, that does not mean that they do not take me seriously. Similarly, I pay serious attention to many views that I ultimately end up disagreeing with. The statutory principle of the MPC is that decisions are made by the majority and I respect and admire that principle. I have absolutely no complaints at all.

How can India tackle the challenge of food price spikes as reflected in inflation? How much control does the RBI have on food inflation?

Supply shocks in food or other commodities should lead to a change in relative prices but not in the general price level in the long run. Relative price changes are the mechanism through which a market economy copes with these shocks. It is the job of monetary policy to prevent the generalisation of food price inflation through second-round effects. The bigger challenge of food price shocks is their distributional effects as they fall disproportionately on economically weaker sections of society. The government’s supply-side responses are instrumental in tackling this challenge.

If you were the advisor to the central government, what are the areas where you envision immediate fiscal attention ahead of the vote on account?

I do not wish to answer this question as an MPC member.