The MPC also states that risks to this projection are evenly balanced.
An unnecessarily restrictive monetary policy can dent the revival in private capital expenditure, says monetary policy committee’s external member Jayanth Varma. He tells Ajay Ramanathan that while there are some signs of revival in private capex, these are still too weak and tentative. Edited excerpts:
In the minutes, you have stated that such a high real rate may not be required at this stage to drive inflation down to the target of 4%. Do you think RBI has overstated the inflation risks?
It is true that I am somewhat more optimistic about disinflation than the rest of the MPC, but that is not what is driving my dissent. My vote to cut the repo rate is based on the MPC’s own projections, which says that inflation would average 4.5% during 2024-25. The MPC also states that risks to this projection are evenly balanced. These projections do not warrant a repo rate of 6.5% because an inflation rate that is only modestly above the target needs a real interest rate of only 1-1.5% and not 2%.
Many believe that we may see a rate cut in the August policy. How likely is this in the current scenario?
I voted for a rate cut and a change of the stance to neutral in this meeting itself. And unless something unexpected happens, that would most likely be my vote in the next meeting as well. But mine is just one vote out of six, and what happens in future MPC meetings depends principally on the votes of other members. I would not like to speculate on what would prompt them to shift their stance.
Do you think prolonged hawkishness will have a negative impact on the economic growth? Where does a central bank draw the line?
During the last couple of years, the government has been driving capital expenditure in infrastructure and other areas. The ongoing process of fiscal consolidation means that the private sector will soon have to pick up the baton on capital expenditure. A high real interest rate impedes this process of private sector capex. If low capital investment persists for several years, we could descend into a vicious cycle of diminishing expectations that depresses growth.
Currently, what are the key downside risks to economic growth?
India’s growth in the last couple of years has been robust when compared to the rest of the world, but not when compared to our potential or to our aspirations. A revival of private capital expenditure is critical for sustained high economic growth. While there are some signs of revival in private capex, these are still too weak and tentative. I worry that unnecessarily restrictive monetary policy could nip this revival in the bud.
Source:financialexpress.com