Exclusive: MPC Member Jayanth R. Varma On BTTV

The forty seventh meeting of the Monetary Policy Committee (MPC) was held during February 6 to 8, 2024. The meeting was attended by all the members – Dr. Shashanka Bhide, Honorary Senior Advisor, National Council of Applied Economic Research, Delhi; Dr. Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai; Prof. Jayanth R. Varma, Professor, Indian Institute of Management, Ahmedabad; Dr. Rajiv Ranjan, Executive Director, RBI Dr. Michael Debabrata Patra, Deputy Governor in charge of monetary policy – and was chaired by Shri Shaktikanta Das, Governor. Prof. Jayanth R. Varma stated that inflation is projected to average 4.5% in 2024-25, and, therefore, the current policy rate of 6.5% translates into a real rate of 2%. “I do not believe that such a high real rate is required at this stage to drive inflation down to the target of 4%. It is true that economic growth is holding up well, but there is no evidence at all that the economy is overheating. Perhaps, the majority of the MPC worry that the output gap has already closed, and that the projected growth rate of 7% for 2024-25 exceeds the growth potential of the Indian economy. I do not think that such growth pessimism is warranted. During the last few years, we have seen several policy measures including digitalization, tax reforms, and a step up in infrastructure investment that should boost the potential growth rate of the economy. Also, the compound average growth rate of real GDP from the pre-pandemic level is quite low: 4¼% per annum from 2019-20 to 2023-24 (First Advance Estimate). Growth pessimism would require one to assume that the pandemic induced a massive permanent scarring of the economy. To the contrary, all indications are that the economy has been quite resilient, and even sectors that were badly battered by the pandemic are bouncing back”, he said. Verma added that if the potential growth rate of the economy is close to 8%, then the economy is not at risk of overheating in 2024-25. “A real interest rate of 1-1.5% would then be sufficient to glide inflation to the target of 4%. A real interest rate of 2% creates the very real risk of turning growth pessimism into a self-fulfilling prophecy. It must also be borne in mind that the process of fiscal consolidation is projected to continue in 2024-25. This opens up space for monetary easing without risking an inflationary spiral. In my view, the time has come for the MPC to send a clear signal that it takes its dual mandate of inflation and growth seriously, and that it would not maintain a real interest rate that is significantly more than what is needed to achieve its target”, he said, adding that he therefore voted to reduce the repo rate by 25 basis points, and to change the stance to neutral. Join Siddharth Zarabi, Managing Editor of Business Today TV, in this discussion with Prof. Jayanth R. Varma, external member of the Monetary Policy Committee (MPC) and Professor at Indian Institute of Management, Ahmedabad.