Resolution ‘confuses more than it clarifies’, MPC minutes cite Varma

‘Withdrawal of accommodation phrasing ought to have been dropped given other considerations’

August 19, 2022 09:42 pm | Updated 10:35 pm IST - Mumbai

Representational file image.

Representational file image. | Photo Credit: Reuters

The Monetary Policy Committee’s August 5 resolution accompanying the Reserve Bank of India’s interest rate increase, which stressed that the MPC would “remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth” ideally ought to have been dropped altogether as it would only serve to provide ‘confusing guidance’, committee member Jayanth R. Varma said at the MPC’s meeting, the minutes released on Friday show.

“This statement confuses more than it clarifies,” Mr. Varma observed. “Because the rate hike in this meeting takes the policy rate above the pre-pandemic level, “withdrawal of accommodation” ... can only mean withdrawal of the pre-pandemic accommodation that began with the rate cut from 6.50% to 6.25% in February 2019. A plain reading of this resolution would then be that the MPC is focused on taking the repo rate back to 6.50%,” he said.

Stressing that such an indication of a terminal repo rate of 6.50% was totally unwarranted in the current situation given that the Ukraine war and the monetary tightening in the advanced economies posed a very serious risk of recession in the world economy, he suggested it would have been “better not to give any guidance than to give confusing guidance”

However, given that inflation was at unacceptably high levels, and the projected trajectory was also above target during the entire forecast horizon, he noted that clearly “further withdrawal of accommodation is warranted”.

“So I am confining myself to expressing my reservations on this resolution. The resolution should in my view be interpreted only as stating that there is a high likelihood of further front-loaded tightening without restricting the freedom of the MPC to respond to the changing environment in a data driven manner,” he emphasised.

RBI Deputy Governor and fellow MPC member Michael Debabrata Patra stressed: “although inflation seems to have peaked, it is still unconscionably high”. Underlining that ‘risks to the trajectory of inflation from currency depreciation, seasonal pressures and the monsoon’s uneven progress could upend the recent moderation in momentum’ he said, “monetary policy’s response to supply shocks has to be predicated on managing expectations and fortifying credibility”.

“By frontloading monetary policy actions, credibility is demonstrated by showing commitment to the inflation target,” he added.

       She sa

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