When inflation gets closer to 4%, focus can shift to growth: Jayanth Varma

Jayanth Varma, member of the RBI’s monetary policy committee, explains why the rate-setting committee needs to wait and watch for now in an interview with Manojit Saha. Edited exerpts:

You talked about two risks on inflation that have emerged since the February meeting. Why don’t you ask for a rate hike then?

These are risks which may or may not materialise. If you look at the monsoon, we have forecast from the India Meteorological Department that says it will be normal. When we met, there was no forecast at all. Skymet is saying it will be below normal. So there is uncertainty about that.

Crude was a risk which was felt at that time. But two weeks since then, I think crude prices have moderated. At one point, we were afraid that it would go to $90/bbl and beyond but now it has dropped down to $81-$82 kind of levels. That risk is also not that serious now as it appeared then. But these are still risks, therefore, one has to be extra vigilant, to wait and see whether these risks materialise. If they don’t materialise, well and good. But if they do materialise then, we have to see whether further action is required or it is just sufficient to hold these rates for longer. So higher or longer, that is a question we will be able to see later. Right now it is not obvious what would be the correct response. In the two weeks since the policy, I think the risks have abated a little but they are still there.

On the growth front, you said early warning signs of a possible slowdown are visible to a greater extent than in February. Which is the bigger risk now – growth or inflation?

Lot of high frequency indicators are showing some signs of slowing. I think both are serious risks, and it is hard to say which is bigger. Clearly, the inflation risks have become a little more pronounced. The whole weather related things…heat wave, monsoon…what that would do to food prices is a worry. That is why I am saying it is a little more troubling now – the inflation risks have become a little worse, growth continues to be a source of worry. At some point we will have to prioritise inflation. Let us first bring inflation under control and then tackle growth – one has to do sequencing. Which one are we going to bring down first? That is the worry that is there and as of now it is only a worry and things will probably become a little clearer by the June meeting and little more by the August meeting. Basically one has to wait and watch. We have done a lot already. More than 3 per cent of tightening has happened and it is having an impact – that is also clearly visible. Tightening is impacting demand.

You have said “the projected rise in this real rate would not require any action by the MPC; it would happen as a mechanical result of a falling inflation rate and an unchanged policy rate.” Are you indicating a prolonged pause from here on?

The target for MPC is 4 per cent. So the MPC cannot say our job is done when inflation comes down to 5.5 per cent or something. And it has to be brought down well below 5 per cent. There may be comfort when it comes closer to 4 per cent. That is going to take some time. Until then, we will have to let it work. When the repo rate is 6.5 per cent and inflation is let us say 6 per cent - then the real rate is half percent positive. If inflation falls to 5.5 per cent, then it is 1 per cent positive. If inflation falls to 5 per cent, then it is 1.5 per cent positive. So that is going to happen without our having to raise rates. Even 6.5 per cent will become tighter as we go along because inflation is projected to fall. In February the real rate was zero; it is half a percent positive now. And in the next couple of quarters we will go to 1 per cent positive and then we may go to 1.5 per cent positive. The hope is inflation to fall. As it starts falling to closer to 4 per cent, that is when there would be headroom for us to shift the eyes from inflation to growth.

When do you think inflation will fall to the RBI’s target of 4 per cent?

According to RBI’s forecast in 2023-24, it is only falling to 5 per cent. I think the estimate is that it may take 18 months or even 24 months (from now), unless we have some pleasant surprise.

Do you think RBI is overestimating growth with 6.5 per cent projection for FY24?

I think there are risks to that estimate. I will not say it is over or under­esti­mate. Because the global scenario is not favourable and even domestically there are some signs of slowing happening. So there are risks to that. Whether these risks will materialise we don’t know.