MPC minutes: Inflation is easing, 25 bps rate hike unwarranted, says member Jayanth Varma

Jayanth Varma, Member, MPC, RBI

Jayanth R. Varma, one of the members of the monetary policy committee (MPC), which sets the policy rates, said the 25 basis points (bps) rate hike announced by the panel is unwarranted in the context of diminished inflationary expectations and heightened growth concerns.

Varma further argued that a repo rate of 6.50 percent very likely overshoots the policy rate needed to achieve price stability and further tightening is not desirable.

“I believe that the 25 basis point rate hike approved by the majority of the MPC is not warranted in the current context of diminished inflationary expectations and heightened growth concerns. I therefore vote against this resolution,” said Varma.

In the February monetary policy, the central bank increased the repo rate by 25 basis points to 6.50 percent to fight against persistently high inflation. This was the sixth straight hike by the central bank in the last 10 months.

Out of the six members, four members voted in favour of a 25 bps rate hike and voted in favour of continuing the policy stance of remaining focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

Varma said in the second half of 2021-22, monetary policy was complacent about inflation, and we are paying the price for that in terms of unacceptably high inflation in 2022-23.

“In the second half of 2022-23, monetary policy has, in my view, become complacent about growth, and I fervently hope that we do not pay the price for this in terms of unacceptably low growth in 2023-24,” Varma added.

Since May last year, the MPC has hiked key policy rate by 250 bps to tackle persistently high inflation. Retail inflation, which remained above 6 percent for the most part of last year, has started easing in recent months.

India’s headline retail inflation rate rose in January to 6.52 percent after falling for two consecutive months. In the February monetary policy, the RBI lowered its inflation forecast for the current financial year by 20 basis points to 6.5 percent, with inflation seen averaging 5.7 percent in January-March.

Meanwhile, core inflation also remained sticky in the last few months and the RBI always mentioned about it remaining sticky and elevated.

Michael Patra, one of the deputy governors, said inflation remains high and remains the biggest threat to the macroeconomic outlook. "Restoration of price stability – as statutorily mandated – will provide a solid foundation for a growth trajectory that actualises India’s potential," Patra said.

Taking into account the height of inflation, current and projected, monetary and financial conditions still reflect some slack, although they are moving into tighter territory with the follow-through of recent monetary policy actions, Patra added.

Patra said while keeping in mind the objective of growth, the foot must remain on the brake as the MPC chart the future trajectory. "On a pragmatic basis, it is important to at least contain inflation within the tolerance band in 2023-24 as the first milestone to be passed in aligning inflation with the target," Patra said.