RBI credibility at risk, says lone dissenter on monetary policy panel

‘The time to ditch the Covid stuff from the monetary policy has come,’ says Jayanth Rama Varma.

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Reserve Bank of India | monetary policy | monetary policy committee

The lone dissenter among India’s monetary policy setters sees the central bank’s inflation-targeting credibility at risk by keeping policy loose for too long and focusing on the impacts of the pandemic.

“Keeping an accommodative stance for too long risks high interest rates in future,” Jayanth Rama Varma, a member of the committee that decides on the Reserve Bank of India’s key policy rates, said in an interview this week. “To maintain its credibility, the central bank might have to do more later than it had to if it had acted early.”

The RBI, led by Governor Shaktikanta Das, has sustained its focus on keeping rates low to support growth while saying inflation, which has already breached the bank’s target range, will ease later in the year.

RBI credibility at risk, says lone dissenter on monetary policy panel

Its dovish stance, reiterated most recently at its policy decision last month, was met with skepticism by economists as other central banks, led by the Federal Reserve, signal normalization as inflation pressures mount.


Varma began voting against the MPC’s stance in August after earlier expressing opposition mainly to language about staying accommodative “as long as necessary” to support growth and mitigate Covid-19’s hit while ensuring inflation stays within target.

“The time to ditch the Covid stuff from the monetary policy has come. The problem besetting the economy has nothing to do with the pandemic,” said Varma, a finance professor at the Indian Institute of Management at Ahmedabad. “Accommodative monetary policy means the risk is only of low growth and low inflation, which I think is not true anymore.”

Here’s more from the interview with Varma:

Falling Behind

“My fear is not that we are behind the curve. My fear is that we risk falling behind the curve. Circumstances tomorrow may need a change in the policy rate, but we have more or less said we will not.”

Stance Change

On Russia’s invasion of Ukraine and the looming risks to global economy, Varma said: “in that context, what I regard as extremely important is that the central bank must maintain its freedom of action. You do not know what’s going to hit you from where. I am, therefore, extremely uncomfortable about the central bank committing to what it will do in the future.”

Reverse Repo

On RBI keeping the reverse repo rate, used to drain excess funds from lenders, unchanged at 3.35%, while holding variable rate reverse repo auctions at 3.99%, Varma said there was a disconnect between the bank’s words and its actions.

That is tantamount to pushing the rate to 4% without saying so, he said.

“It defies logic,” Varma said. “It is a kind of superstitious belief that if you write 3.35% in the monetary policy statement, it will do some magic to the economy.”

Inflation Outlook

On the central bank’s benign inflation outlook defying economists’ forecast, Varma cited the fan chart of RBI that shows inflation hovering around 6%-6.5%, and maybe even 7% next fiscal year.

“You don’t need an external analyst to tell you that. If you see a possibility of 7% inflation, how can you maintain an accommodative stance? That is the question that I am asking.”

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