The minutes of the MPC released today shed light on the reasons behind his decision. Prog Varma said that the “balance of risk and reward is gradually shifting, and this merits a hard look at the accommodative stance”.
The RBI kept the repo rate unchanged at 4 per cent in its meeting held in August and kept the growth forecast intact at 9.5%.
The RBI raised its inflation projection for the entire year to 5.7% from 5.1% earlier. However, it continued to describe the spike as transitory. Prof Varma’s dissenting MPC position appears to have factored in the long term implications of keeping the monetary stance accommodative.
“Monetary accommodation appears to be stimulating asset price inflation to a greater extent than it is mitigating the distress in the economy,” Prof Varma said.
As the Covid cases pick up in rest of the world including some of the countries like Israel with higher vaccination rates, Prof Varma said that the pandemic could be with us for 3-5 years with reduced mortality.
In such a context, keeping the stance accommodative for a long horizon merits a review.
“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.”
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