‘It is perhaps best that policy stance be scrapped altogether’: Jayanth Varma, external member, MPC

I think India has sufficient monetary autonomy to formulate its monetary policy based on domestic macroeconomic considerations, says Varma.

In picture: Jayanth Varma, external member, MPC 

The policy stance of withdrawing accommodation has become meaningless and serves no useful purpose, says the monetary policy committee’s (MPC) external member Jayanth Varma. He tells Sachin Kumar that there is no need for RBI to postpone the rate cut until the Federal Reserve starts to ease. Excerpts:

The Federal Reserve Chairman has said that “the time has come for policy to adjust.” Does this strengthen the case for the RBI to cut rates in October?

I think India has sufficient monetary autonomy to formulate its monetary policy based on domestic macroeconomic considerations. With a modest current account deficit, we don’t need to worry about financing it even if the interest rate differential is reduced. Therefore, there is no need to delay our rate cut until the Fed begins to ease.

You have mentioned an early warning signal that growth may already be slowing down and advocated for a 50 basis point cut in the repo rate. Will this rate cut address your concerns about the growth slowdown?

Monetary policy acts with lags of three to five quarters. Rate cuts now would improve growth in 2025-26, but would have only a small impact on the growth for 2024-25.

The banking system has been in surplus for the past couple of months despite the policy stance of withdrawing accommodation. Does this send confusing signals?

I have long argued that the stance has become quite meaningless and serves no useful purpose. It might be best to scrap the stance altogether. If that isn’t feasible, then adopting a neutral stance would make much more sense.

Given that disinflation has been prolonged, when do you expect CPI inflation to align durably with the RBI’s 4% target?

Inflation is projected to be quite close to 4% in the next few quarters, and I expect that it will decline further in 2025-26, and align durably with the target.

You are not optimistic about growth in the coming quarters. Is there a downside risk to the growth projection?

I do worry about downside risks, but I hope that these risks do not materialise.

As your term at the MPC is coming to an end, and given your criticism of the stance of withdrawing accommodation, how do you view the overall policymaking process?

It has been a great privilege to have served on the MPC during these challenging times. I have become more convinced than before that flexible inflation targeting is an effective tool for dealing with unexpected shocks of various kinds. I view dissent as an intellectual disagreement rather than a personal disagreement and have never allowed it to cloud my perception of the policy-making process. All in all, I am quite happy with my experience at the MPC.