Positing COVID may linger ‘for 3-5 years’, he says ‘keeping policy accommodative for long is difficult’
Monetary Policy Committee (MPC) member Jayanth Varma has expressed serious reservations about the RBI maintaining a protracted “accommodative” policy stance in the light of uncertainty about the duration of the ongoing COVID-19 pandemic, contending that the forward guidance and monetary stance were becoming “counter productive”.
“By creating the erroneous perception that the MPC is no longer concerned about inflation and is focused exclusively on growth, the MPC may be inadvertently aggravating the risk that inflationary expectations will be disanchored,” he is cited as having said at the August 4-6 meeting of the Reserve Bank of India’s rate-setting panel, the minutes released by RBI on Friday show.
The MPC decided unanimously to hold policy rates unchanged and by a 5-1 majority voted to continue with the accommodative stance as long as necessary to revive and sustain growth, with Mr. Varma being the sole dissenter.
“As the pandemic continues to mutate, it appears to me that the balance of risk and reward is gradually shifting, and this merits a hard look at the accommodative stance,” Mr. Varma said.
‘Neutron bomb, TB’
Contending that COVID-19 was beginning to look more and more like tuberculosis which kills a large number of people every year without inflicting major damage to the economy, and thus resembling a ‘neutron bomb’, he said the ability of monetary policy to mitigate a human tragedy of this nature was very limited as compared to its ability to contain an economic crisis.
“The possibility that COVID-19 will haunt us (though with lower mortality) for the next 3-5 years can no longer be ruled out. Keeping monetary policy highly accommodative for such a long horizon is very different from doing so for what was earlier expected to be a relatively short crisis,” he added.
Arguing that monetary policy was much less effective than fiscal policy for providing targeted relief to the worst affected segments of the economy, he said: “monetary accommodation appears to be stimulating asset price inflation to a greater extent than it is mitigating the distress in the economy”.
Emphasising that inflationary pressures were beginning to show signs of greater persistence than anticipated earlier he said, “There are indications that inflationary expectations may be becoming more widely entrenched. Most worrying of all, there is now a reduced degree of confidence that demand side inflationary pressures would remain quiescent.”
Disagreeing with other members on the level of the reverse repo rate Mr. Varma said, “I believe that the current level of the reverse repo rate is no longer appropriate. I am conscious of the fact that the MPC’s mandate is supposed to be restricted to the policy rate or the repo rate.
“Unfortunately, the monetary policy statement of this meeting (as in the past several meetings) contains the line: “Consequently, the reverse repo rate under the LAF remains unchanged at 3.35%”. I have for some time now being arguing that if the reverse repo rate does not fall within the remit of the MPC, then the announcement of this rate should be in the Governor’s statement and not in the MPC’s statement, but this view has not found favour with the rest of the MPC. Hence, I have no choice but to express my disagreement with the level of the reverse repo rate,” he added.
Observing that a gradual normalisation of the width of the corridor was warranted, he said, “In my view, a phased normalisation of the corridor would increase the ability of the MPC to keep the repo rate at 4% for a longer period, and this should in my view be a greater priority for the MPC than maintaining an ultra-low reverse repo rate for some more time.”
Mr. Varma also stated, “At a time when the economic recovery is still nascent, it is extremely important that monetary policy serves as an anchor of macroeconomic stability. That would reduce the inflation risk premium as well as the term premium and help stabilise long term interest rates.”
Another member, Shashanka Bhide had observed: “Even as there are signs of economic recovery from the disruption to the growth momentum achieved in Q4 of FY21, the conditions impacting inflation are a concern. The global commodity prices impact the overall domestic price situation. One of the key drivers of the present inflation is the fuel prices.”
And the third external member of the MPC Ashima Goyal had remarked: “A global conviction seems to have formed up that the inflation spike is due to COVID-19 related supply bottlenecks and therefore is temporary. U.S. 10-year G-sec rates have softened. Research finds inflation to be more in COVID-19 affected products.
“MPC has a difficult job as it battles both the slowdown and the inflation COVID-19 has triggered,” she had noted, the minutes revealed.
For all the latest business News Click Here
