With inflation only modestly above target, the risk of it rising to a very high level is low, says monetary policy committee’s (MPC) external member Jayanth Varma. He tells Ajay Ramanathan that a tepid global demand is a major headwind to growth. Excerpts:
Most of your colleagues on the MPC have highlighted that inflation risks still persist. Are the risks overestimated?
It is true that there are risks to the forecasts, but the MPC has clearly stated that the risks are balanced on both sides. Inflation could be lower or higher than what is being forecast. Moreover, with inflation only modestly above target, the risk of it rising to a very high levels is rather low. Inflation expectations remain well anchored.
By when will inflation align to the 4% target? What factors will influence this?
I expect that inflation will hit the target on a sustained basis in 2025-26, but even in 2024-25, it would be only modestly above target.
In your view, what is the rationale behind persisting with the ‘withdrawal of accommodation’ stance?
Two of us have dissented from the stance at this meeting. I find it difficult to fathom the rationale behind this stance.
The projected real GDP growth for 2024-25 has been revised upwards to 7.2%. Will this be hampered by an overly restrictive policy?
There is a lot of forecast uncertainty, and I am not too concerned about a variation of 10 or 20 basis points (bps) in the growth rate. My worry is that almost all forecasters are projecting a growth rate that is below potential and below what is needed at the current stage in our demographic transition. I see an urgent need for monetary policy to support growth to the extent possible while remaining restrictive enough to put downward pressure on inflation.
What are some of the other downside risks to economic growth?
Tepid global demand is a major headwind to growth currently.