Developments in the external environment is a sizeable risk to macro-economic growth, and outcomes must be monitored carefully in the next few months, says external member of MPC Jayanth Varma. He tells Ajay Ramanathan that the uptick in capex related credit demand is an encouraging sign and it needs to be monitored over the next few quarters. Excerpts:
Q. Do you believe that the current policy rate is sufficient to keep inflation under check considering that the estimate has been revised upward? What factors will bring inflation down in the days to come?
A. What we are witnessing is an inflation spike that is expected to last only a few months as it is being largely driven by volatile vegetable prices. Monetary policy is restrictive enough to ensure that food price spikes do not lead to generalised inflation. I expect core inflation to decline and this should help bring headline inflation within the tolerance band.
Q. Some bankers have openly stated that the private capex as shown signs of picking up. When are we likely to see a full-fledged revival?
A. The uptick in capex related credit demand is an encouraging sign and I do hope that we are witnessing the initial stages of an upswing in the capex cycle. We need to keep watching this over the next few quarters.
Q. What are some of the key risks to overall macroeconomic growth?
A. I think the key risk remains the external environment which is far from benign. Also any deficiency in the monsoon would be as much a demand shock as it is a supply shock. We should therefore continue to monitor growth outcomes carefully over the next few months.
Q. How do you assess the reaction of the equity market to policy actions? Is it a relationship of causation or correlation?
A. The equity market responds as much if not more to anticipation of future events as to the events themselves. It also assimilates a wide range of information that goes far beyond monetary policy. As such, it is hard to isolate the impact of monetary policy per se. In any case, I do not think the MPC should worry about equity market reaction to its actions.