‘The economy has been held up by government investment, and the ongoing process of fiscal consolidation is gradually withdrawing that stimulus.’
The risks to the economy from flare-up in tensions in the Middle East seem to have abated, as reflected in the muted response of crude oil prices. Jayanth Varma, the only member of the RBI’s six-member Monetary Policy Committee who voted for a rate cut at April 5 policy meeting, tells Sachin Kumar that forecasts of a good monsoon for this year suggest that the severity of food price shocks should be less. Excerpts:
Has the recent escalation in tensions in Middle East changed your views on rate cuts?
The Israel-Iran conflict was beginning when the MPC met. In the period since then, the risks appear to have abated somewhat as reflected in the muted response of crude oil prices. We do not know how the situation would evolve in coming weeks, but as of now, the situation is not worrisome.
You mentioned that the current real policy rate of 2% is excessive. With growth expected to moderate in the current fiscal, do you see this excessive real policy rate as a major risk to India’s growth momentum?
The economy has been held up by government investment, and the ongoing process of fiscal consolidation is gradually withdrawing that stimulus. It is necessary for private capital investment to pick up the baton, but we have been waiting for many quarters now for this to happen. Monetary policy should be wary of keeping rate so tight that it prevents a revival of private sector capital investment.
India is expected to see above-normal monsoon this year. Do you expect a favourable monsoon to cool food inflation and meaningfully help bring CPI inflation closer to the RBI’s 4% target?
The more favourable monsoon forecasts for this year suggest that the severity of food price shocks should be less. Moreover, the experience in 2023-24 was that food price shocks were transient, and I expect that 2024-25 also would experience only transient shocks.
Is a sub-8 % growth strong enough to talk about sacrificing it to lower inflation?
My argument has been that sub-8 % growth is not adequate at this juncture where we are still well below the pre-pandemic trend line. Moreover, this is also the period where India ought to be growing more rapidly because of the ongoing demographic dividend.
With new uncertainties around, when do you expect CPI inflation to align with RBI’s 4% target durably?
I expect this to happen early in 2025-26.
RBI’s in-house study has projected FY25 GDP to grow by 7.4% and retail inflation at 4.4 %. Will these projections have any bearing on the policy making?
The MPC considers several projections including those by different teams at RBI and those by professional forecasters outside the RBI. It uses its own judgment to arrive at the monetary policy action.
Source:financialexpress.com