RBI Monetary Policy Committee (MPC) member Jayanth Varma said there should not be ‘intolerable growth sacrifice’ to tame inflation abruptly.
Reserve Bank of India Monetary Policy Committee (MPC) member Jayanth Varma said there should not be ‘intolerable growth sacrifice’ to tame inflation abruptly.
According to Mr Varma, efforts to lower inflation “too abruptly” should be avoided because the Indian economy has just recently recovered from the effects of the coronavirus outbreak.
The MPC member on Sunday expressed cautious optimism for the nation’s economy, saying that growth expectations for the 2022–2023 and 2023–2024 fiscal years are “realistic” even after accounting for the risk of a protracted period of geopolitical unrest and high commodity prices.
Inflation will be brought down to the target level in the medium term, and India’s growth prospects are ‘reasonable,’ he added.
The MPC has adopted a more hawkish approach amid persistently rising inflationary pressures. In the past five weeks, the benchmark interest rate has increased by 90 basis points to a two-year high of 4.90 percent. Earlier this month, a 40 basis point increase was implemented.
Mr Varma said the pandemic was the biggest test to the system so far, and the flexible inflation targeting regime proved itself equal to that task, in an interview with PTI.
“The inflationary episode has lasted longer than we would have liked and will continue to last longer than we would like, but, I have no doubt in my mind that inflation will be brought down to the target level in the medium term.
“The Indian economy has barely recovered from the pandemic, and we have to be careful not to impose an intolerable growth sacrifice in our attempt to tame inflation too abruptly,” Mr Varma said.
Additionally, his remarks are made in light of worries expressed in certain quarters that the central bank could have begun raising rates to combat inflation a little earlier. The MPC increased the benchmark interest rate by 40 basis points in early May, raising it for the first time since August 2018.
The RBI is responsible for keeping retail inflation at 4 per cent with a 2 per cent margin on either side. This aim is considered for setting policy rates by the six-member MPC of the central bank, which is led by the governor of the RBI.
The risks to inflation are now balanced, according to Varma, a professor of finance and accounting at IIM Ahmedabad, as both geopolitical and weather uncertainty could change in either direction.
He said that tighter financial conditions both nationally and worldwide will help to restrain the growth of demand-side forces.
“Financial conditions have tightened both globally and domestically, and this would help contain the emergence of demand-side pressures,” said the policymaker.
Mr Varma cited a number of factors, including the Russian-Ukrainian war and supply shocks in food and other goods, for why inflation has been high. He also noted that supply-side problems have been more significant than demand-side pressures.
“Part of the inflationary pressures are coming from global factors – crude oil, edible oil, and other commodities. Part of the shock is also arising from the effect of adverse weather conditions on domestic agricultural production,” he noted.
“But within this depressed context, I am cautiously optimistic about the Indian economy today…The economic recovery in India has been resilient in the face of the shocks created by the Ukraine war, and the growth prospects for 2022-23 and 2023-24 are reasonable even if we assume a long-drawn-out period of geopolitical tensions and elevated commodity prices,” he said.
Source:ndtv.com