MC Interview | As inflation falls, repo should be cut to prevent real rate from rising too high, says Jayanth Varma

Jayanth Varma voted for a 25 bps rate cut in repo in the last round of the monetary policy.

As inflation cools off, the repo rates should be lowered to prevent the real rates from simmering, believes Jayanth Varma, a member of the panel that sets the key policy rates in India.

Varma is one of the three external members of the Monetary Policy Committee (MPC) of the Reserve Bank of India, who voted for a 25 basis cut in repo rate in the June 5-7 meeting. The MPC, however, decided to hold the rates steady yet again with the majority backing a hold.

“My vote for a 25 basis points cut will still keep the monetary policy sufficiently restrictive to glide inflation towards its target,” Varma said during an interaction with Moneycontrol. A restrictive policy isn’t good for the economy on the growth-front, he cautioned.

Here's an excerpt from the interview with Jayanth Varma of the MPC.

You issued a clear warning that maintenance of restrictive policy for long will lead to sacrificing growth in FY26. 

We were already reconciled to the prospect of a growth sacrifice in 2024-25 as the price for bringing inflation down. What is alarming is that the forecasts from the RBI survey of professional forecasters and elsewhere is that growth in 2025-26 will be roughly similar to the forecast for 2024-25. In other words, sacrificing 0.75 percent or 1 percent economic growth will last not for one year, but for two. This makes the growth-inflation tradeoff a lot worse than we expected. With the inflation scenario looking a lot more benign than last year, we should ask ourselves whether such a large sacrifice is necessary.

The retail inflation glide path suggests that inflation is unlikely to meet the 4 percent medium-term target this year, at least. How do you see this?

There are two issues here. First, monetary policy is a forward-looking strategy. We do not wait for inflation to fall before we cut rates. We need to start cutting rates as we see evidence that inflation is falling towards the target.

Second, we should think of monetary policy in terms of the real policy rate and not the nominal policy rate. As inflation falls, the nominal repo rate needs to be cut to prevent the real rate from rising too much. I believe a 25 basis points cut could still keep monetary policy sufficiently restrictive to glide inflation towards its target.

How do you think prolonged high-rate regime impacts growth? 

High interest rates choke off consumption as high EMIs for home loans and other borrowings eat away a larger share of the income. High rates also discourage private sector capital investment. What we have observed is that both consumption and private capex have been weak, and these have been offset by higher government capital expenditure.

This time, fellow MPC member Ashima Goyal, too voted for a rate cut in a departure from the last many policy reviews.

It is certainly good to have another voice emphasising the growth concerns that are there today.

Moving on to stance, most members of the Committee remained persistent in terms of continuing with the ‘withdrawal from accommodation’.

Two of us voted against that this time.

The MPC meeting outcomes every two months have become so predictable in the last two years. Do you think we should go back to quarterly reviews?

Not at all. Many of these reviews may lead to no change in the policy rates, but they are still essential. It is necessary to review the macroeconomic situation on a regular basis to identify emerging risks and changing tradeoffs. A significant amount of data comes in every month, and that leads to changes in projections about growth and inflation. The discipline of making forecasts and reviewing forecast performance every two months is extremely valuable.

Do you see the possibility of the extra cash surplus transfer to government - almost double than budgeted - adding to inflation management risks of the MPC?

I would like to wait and see what happens in the budget which is not so far away.

At a broader level, do you feel that the price trends on ground are adequately captured by the inflation data? Often, there is a disconnect between what is reported from ground and what is shown in the inflation data, particularly in essential items.

On the whole, I do not see any major problems with the inflation data. There are problems of measurement and aggregation in any macroeconomic data release anywhere in the world, and we have to live with them.