Time ripe for MPC to provide interest rate projections, says Jayanth Varma

An external member of the Reserve Bank of India’s Monetary Policy Committee (MPC) has said the time is “ripe” for the rate-setting panel to provide projections for the future path of the policy rate.

“This would help stabilise long-term bond markets and also anchor inflation expectations,” external member Jayanth Varma said in the minutes of the MPC’s June 6-8 meeting that were released on June 22.

According to Varma, the MPC has enough experience to provide a forward-looking view for interest rates, with the RBI having evolved into a “mature” inflation targeting" central bank.

While Varma did not elaborate, he seemed to be suggesting that the six-member MPC provide a forecast for the repo rate similar to that of the US Federal Open Market Committee’s famous ‘dot plot’ for the mid-point of the federal funds rate target range.

The dot plot shows US monetary policymakers–both voting and non-voting members–where the US interest rate is expected to be at the end of the current and next few calendar years along with a long-term view.

Also read: RBI committed to bringing inflation within target, MPC meeting minutes show

The dot plot serves as a key guide for financial markets, with their expectations moulded by changes to the dot plot when it comes to the quantum of rate increases, or decreases, seen by FOMC members from meeting to meeting.

Varma said there was merit for the MPC to send similar signals on the “likely pace of this tightening in more quantitative terms” as it navigates the process of withdrawal of accommodation.

The MPC raised the repo rate by 50 basis points on June 8 after increasing it by 40 basis points in an unscheduled policy meeting a month earlier to ease the price pressure. One basis point is one-hundredth of a percentage point.

Widely seen as the most hawkish member of the MPC members, Varma said he wanted the repo rate to be increased by 60 bps points on June 8 but decided to go along with the majority view of 50 bps as a difference of opinion of 10 bps was not “material enough to be elevated to a dissent", the minutes showed.

Varma has on more than one occasion dissented on the continuation of the accommodative stance in the past, saying the panel's communication needed to be precise or the MPC would risk its credibility.