Growth is fragile, real interest rates too high: MPC member Jayanth Varma

In an interview with Business Standard, MPC member Jayanth Varma says the committee should not tie its hands by adopting the withdrawal of accommodation stance

Real interest rates are too high during a period of fragile growth expectations, and not sure all MPC members understand the stance in the same way, says Jayanth Varma in an interview with Manojit Saha.

The January inflation number once again was above the 6 per cent mark. Do you think it was an aberration? Many would argue it was correct to hike rates in the February policy since inflation is still not coming under control. How do you respond?

Monetary policy works with a lag of 3-5 quarters. Setting rates based on last month's inflation is like driving a car by looking in the rear-view mirror. What is important is forecast inflation 3-4 quarters ahead. Measured against that, the real interest rate is positive and quite likely large enough to moderate demand and keep inflation under control.

How worried are you about sticky core inflation? RBI internal members seem more worried about core inflation than external members. Why do you think there is a divergence of views among internal and external members?

Core inflation has been elevated for several quarters now. This would be a matter of grave concern if it were associated with a disanchoring of inflation expectations. The evidence is quite to the contrary: inflation expectations have come down sharply, particularly in the case of businesses. Core inflation has been high for so long, most probably due to a succession of supply shocks and the decision of businesses to pass on cost pressures to selling prices in a phased manner instead of all at once.

Why do you think that there is complacency about growth?

Exports have slowed; the significant reduction in the fiscal deficit is clearly contractionary; rising interest rates flowing through into raising EMIs create a headwind for private consumption. Private capital expenditure is still very tentative, and rising rates could choke this off as well. So growth is very fragile.

Taking one year ahead inflation into account, the real interest rates are above 100 bps. Is it very high? What should the real rates be for a country like India?

I think it is too high during a period of fragile growth expectations. Moreover, the real rate would be even higher if inflation projections were based on realistic assessments of the weighted average price of Indian imports. Brent crude is about $10 cheaper than the aimed price of $95, and we must also consider the large share of much cheaper Russian crude in the import basket.

You have voted against the stance of withdrawal of accommodation. What, according to you, should have been the stance?

Long ago, I stated that a dot plot is a much better way to communicate the thinking of the MPC than a "stance" that most people do not fully understand.

I am not sure that even all the members of the MPC understand the stance in the same way.

The stance appears to represent a commitment by the MPC to keep raising rates in future, and I do not believe that the MPC should tie its hands in this manner. The MPC should retain the freedom to raise rates, lower rates, or keep them unchanged depending on how the situation evolves going forward.