Monetary policy has become complacent about growth, says MPC member Jayanth R Verma

Expressing concern that India's monetary policy has become complacent about growth and that the country may suffer the consequences of this in the form of unacceptable low growth in 2023-24, Monetary Policy Committee member Prof Jayanth R Verma said that a repo rate of 6.50 per cent very likely overshot the policy rate needed to achieve price stability, and further tightening was not desirable.

Prof Varma was one of two members of the MPC who voted against the repo rate increase. At the MPC meeting held earlier this month the two voted no on the resolution so they could keep their attention on the “removal of accommodation” issue.

“In the second half of 2021-22, monetary policy was complacent about inflation, and we are paying the price for that in terms of unacceptably high inflation in 2022-23. In the second half of 2022-23, monetary policy has, in my view, become complacent about growth, and I fervently hope that we do not pay the price for this in terms of unacceptably low growth in 2023-24,” Prof Verma was quoted by in the Reserve Bank of India statement on the minutes of the meeting that was issued on February 22.

Professor Varma from the Indian Institute of Management, Ahmedabad (IIM-A) argued that the 25-basis point rate hike recommended by the majority of the MPC is not warranted in light of recent low inflation expectations and rising growth worries.  “I believe that the 25-basis point rate hike approved by the majority of the MPC is not warranted in the current context of diminished inflationary expectations and heightened growth concerns. I, therefore, vote against this resolution,” he added.

Dr. Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai, who voted for a pause in rate hikes said that any excessive front-loading of rate hikes carries the risk of over-shooting that is best avoided for compelling reasons in the Indian context.

“First, raising real policy rates to reduce demand has a stronger effect on growth than it does on inflation. Second, since there are more lags in monetary transmission in India, over-shooting can have persistent deleterious effects here, including instability. Third, macroeconomic stability improves most rapidly if real interest rates are kept smoothly below growth rates and counter external shocks. The Indian economy is well-poised to achieve this combination and to reduce its chronic underemployment,” her statement said.

Dr. Michael Debabrata Patra, RBI deputy governor in charge of monetary policy observed that the fight against inflation is complicated by the global outlook.

“There is some consensus growing around a milder slowdown than earlier feared, although geographical disparities complicate the prognosis. Be that as it may, the outlook for global inflation is turning more uncertain than before. While central banks expect only a stubborn easing, financial markets are betting on a more dramatic downturn as commodity price pressures ease and supply chains improve. Nonetheless, future shocks associated with the war and the pandemic are possible, he said.

Concluding the RBI statement, the central governor Shaktikanta Das said that there had been some discussion in the public space about the need to give forward guidance on monetary policy actions. “As I have stated on several occasions, it would be inadvisable to provide specific guidance when we are in a tightening cycle and when we are experiencing such extreme uncertainty,” he said. 

Das opined that the only forward guidance that the RBI can provide is that it would remain vigilant, monitor every incoming information and data, and shall act appropriately to maintain price stability in the interest of strengthening medium-term growth.