MC Interview | MPC should be wary of keeping rate so tight that it prevents revival of private capex: Jayanth Varma

Jayanth Varma has called for more consistency between the words and actions of MPC.

The Monetary Policy Committee (MPC), which sets the interest rate in India, has been fighting a protracted battle against a persistently high inflation in Asia's third largest economy in recent years. In the April 5 MPC meet, too, the panel decided to leave the key rates unchanged.

As inflation simmered, the MPC hiked the key repo rate by 250 basis points between May 2022 and February 2023, when it adopted a pause citing that inflation needed to ease to the medium term target of 4 percent before further rate actions.

In an exclusive interview with Moneycontrol, MPC member Jayanth Varma cautioned that the economy has been held up by government investment and the ongoing process of fiscal consolidation is gradually withdrawing that stimulus.

"It is necessary for private capital investment to pick up the baton, but we have been waiting for many quarters now for this to happen. Monetary policy should be wary of keeping rate so tight that it prevents a revival of private sector capital investment," Varma said.

He also highlighted that there is a disconnect between the actions and words of MPC which needs to be addressed.

Varma was referring to the policy stance of the rate-setting panel that remains 'withdrawal from accommodation', suggesting rate tightening, even though the central bank hasn't  hiked the rates for over a year.

In the interview, he touched upon a range of issues, including his views on growth, impact of heatwaves on food inflation, emerging geopolitical risks, and so on.

Excepts from the interview:

There have been fresh upside risks since the last policy review, such as the Iran-Israel conflict and rising global crude prices. Will these factors significantly alter the course of inflation in India?

The Israel-Iran conflict was beginning when the MPC met. In the period since then, the risks appear to have abated somewhat as reflected in the muted response of crude oil prices. We do not know how the situation would evolve in coming weeks, but as of now, the situation is not worrisome.

In the MPC minutes, you mentioned that current real rates of 2 percent is excessive...

I had voted for a cut of 25 basis points both in this meeting as well as in the previous one.

What are the costs of holding rates high for too long in the Indian context? Should the MPC shift focus to growth now from an inflation-based policy? In the past, you had argued that high interest rates for too long can impact nascent growth recovery...

The economy has been held up by government investment, and the ongoing process of fiscal consolidation is gradually withdrawing that stimulus. It is necessary for private capital investment to pick up the baton, but we have been waiting for many quarters now for this to happen. Monetary policy should be wary of keeping rates so tight that it prevents a revival of private sector capital investment.

How big is the risk of uncertain food prices on the inflation trajectory?

The experience in 2023-24 was that food price shocks were transient, and I expect that 2024-25 too would experience only transient shocks. Moreover the monsoon forecasts are more favourable this time, and so the severity of the shocks should also be less.

The RBI’s on inflation projection indicates that inflation is unlikely to fall back to the 4 percent levels this year. When will this be really achievable in your view?

I expect this to happen in early 2025-26.

You sought to change the stance to 'neutral'. But, high oil prices and geopolitical shocks indicate continuing pressure on inflation. Wouldn’t it be a bit premature to change stance now?

For more than a year now, there have been no rate hikes, while the stance has been promising a hike. There is a dissonance between words and actions. I am only proposing to make the words consistent with the actions.

What are your views on GDP growth numbers of last year. Does it reflect the ground reality? Will the country achieve 8 percent-plus this year?

I think there is a good chance that growth will be close to 8 percent this year. My concerns are about 2024-25 where forecasts suggest a significant slackening of growth.

Can the heatwave warnings upset the inflation dynamics?

I expect any food price shocks emanating from this to be transient. Also the geographical distribution of the heatwave is less damaging to the food crop.

The banking system liquidity has been retained tight by the RBI which is impacting the deposit mobilisation of banks as well. Banks are struggling on the deposit-front... 

I think liquidity management is outside the remit of the MPC, except to the extent that it disrupts the process of monetary transmission. I think it is a conscious choice on the part of the banks not to mobilise high-cost deposits. The repo rate today is at the same level as it was in early 2019 (250 basis point cut followed by 250 basis point hike), but the interest rate on fresh retail bank deposits has fallen by almost 50 basis points during this period.

How big as a factor is the general elections from a monetary policy point of view? From the fiscal policy context, what should be the priority of the new government?

I see a clear thrust on fiscal consolidation, and this in my view opens up the path for monetary easing.