- Rates can be raised if growth robust and inflation high: Varma
- Once most-hawkish monetary panel member has now turned a dove
According to Bloomberg article published on February 24, 2023, India’s most dovish rate setter who warned of a severe growth hit due to aggressive policy tightening wants the central bank to pause, rather than stop, to assess growth-inflation dynamics before acting further.
“I do not recommend a ‘stop’ only a ‘pause’: if we see robust growth and stubborn inflation down the road, we should be ready to raise rates,” Jayanth Rama Varma, an external member in the policy panel, said in an interview by email. “Back in December, I recommended a pause at around 6%.”
The Reserve Bank of India raised the key lending rate to 6.5% on Feb. 8 as inflation stayed well above the mid-point of its 2%-6% target. Varma, previously India’s most-hawkish rate-setter, teamed up with his monetary policy committee colleague Ashima Goyal to vote against the decision that seemed “complacent about growth.”
Divisions in the monetary panel are growing as members debate how much tightening is enough to tamper inflation without sacrificing the growth too much. Varma’s views on keeping the rate-increase option open will aid Governor Shaktikanta Das’ resolve to “remain unwavering” in inflation fight.
Consumer-price growth accelerated to 6.52% in January, the fastest pace in three months, fueling expectations of another rate increase in April review. While inflation is acting stubborn, economic growth is moderating, explaining the divisions in the monetary panel. Data due Feb. 28 is likely to show an expansion of less than 7% in the year to March.
Varma’s comments mirror that of Governor Rhee Chang-yong who said the Bank of Korea could resume policy tightening to counter inflation after the board kept interest rates unchanged Thursday for the first time in a year.
“My fear is that all sources of demand in the economy are contracting at the same time,” Varma said, and added that in a period of rising real rates, private capital expenditure is unlikely to prop up the economy and aid sectors such as exports and household consumption that are under pressure. He expects inflation to ease globally next fiscal year.
