New Delhi/Mumbai: The lone dissenter among India’s monetary policymakers sees the central bank’s credibility on inflation targeting threatened by keeping policy loose for too long and focusing on the impacts of the pandemic.
“Holding a dovish stance for too long risks driving up interest rates in the future,” Jayanth Rama Varma, a member of the Reserve Bank of India’s rate-setting committee, said in an interview this week. “To maintain its credibility, the central bank may have to act later than if it had acted sooner.”
The RBI, led by Governor Shaktikanta Das, maintained its target of keeping rates low to support growth while saying inflation, which has already exceeded the bank‘s target range, will ease later in the year.
His dovish stance, most recently reiterated in his policy ruling last month, has been met with skepticism from economists as other central banks, led by the Federal Reserve, signal normalization as inflationary pressures mount.
Varma began voting against the MPC’s position in August after earlier expressing opposition primarily to the language of remaining dovish “as long as necessary” to support growth and soften the blow of Covid-19 while ensuring that the inflation remains within target.
“Now is the time to ditch the Covid stuff of monetary policy. The problem besetting the economy has nothing to do with the pandemic,” said Varma, a professor of finance at the Indian Institute of Management in Ahmedabad. “Accommodative monetary policy means the risk is only low growth and low inflation, which I believe is no longer true.”
Here’s more from the interview with Varma:
“My fear is not that we will be late. My fear is that we may be late. Circumstances tomorrow may necessitate a change in the policy rate, but we have more or less said that we will not. »
Change of posture
On Russia’s invasion of Ukraine and the imminent risks to the global economy, Varma said: “In this context, what I consider extremely important is that the central bank must maintain its freedom of ‘action. You don’t know what will hit you from where. So I am extremely uncomfortable with the idea of the central bank committing to what it will do in the future.
On RBI keeping the reverse repo rate, used to drain excess funds from lenders, unchanged at 3.35%, while maintaining floating rate reverse repo auctions at 3.99%, Varma said that There was a disconnect between the bank’s words and its actions.
That’s like pushing the rate to 4% without saying so, he said.
“It defies logic,” Varma said. “It’s kind of a superstitious belief that if you write 3.35% in the monetary policy statement, it will do magic for the economy.”
On the central bank’s benign inflation outlook defying economists’ forecasts, Varma cited the RBI fan chart which shows inflation hovering around 6% to 6.5%, and possibly even 7% next fiscal year. .
“You don’t need an outside analyst to tell you that. If you see a possibility of 7% inflation, how can you maintain a dovish stance? That’s the question I’m asking. »-Bloomberg
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