War against inflation not yet won, premature to declare end to tightening cycle: RBI MPC’s Varma

No further ‘withdrawal of accommodation’ remains to be done since the repo rate has already been raised to the 6.5% level prevailing at the beginning of the previous easing cycle in February 2019, he says

Stating that the MPC has to keep a careful watch on the evolving situation, Jayanth Verma wrote: “If crude were to creep towards the triple-digit mark, there might be a need for a monetary response.” | Photo Credit: AFP

The war against inflation has not yet been won, and it would be premature to declare an end to the current tightening cycle, RBI’s Monetary Policy Committee (MPC) member Jayanth R. Varma remarked in his statement in the last MPC meeting, the minutes of which were released by the Reserve Bank on Thursday reveal.

Mr. Varma had expressed reservations on the second resolution, namely: “MPC decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target. While supporting growth, he wrote, “I cannot put my name to a stance that I do not even understand. At the same time, it is clear that the war against inflation has not yet been won, and it would be premature to declare an end to this tightening cycle.”

He observed there was need for heightened vigilance in the face of the fresh risks [an oil output cut by OPEC+ and monsoon-related] that have emerged.

Stating that the MPC has to keep a careful watch on the situation, he wrote: “If crude were to creep towards the triple-digit mark, there might be a need for a monetary response.”

Mr. Varma emphasised that a deficient monsoon would likely create inflationary pressures that would need to be counteracted with monetary policy measures. “We will however have to wait till May or even early June to have reasonable clarity on this matter,” he said.

“On the growth front, early warning signs of a possible slowdown are visible to a greater extent than in February. In the current situation of high inflation, monetary policy does not have the luxury of responding to these growth headwinds,” Mr. Varma wrote.

In fact, it is almost “axiomatic’ that monetary action can cool inflation only by suppressing demand. However, policymakers must be vigilant against overshooting the terminal policy rate, and thereby “slowing the economy” to a greater extent than what is needed to glide inflation to the target, he added.

On the stance, he said, “I must confess that I fail to comprehend its meaning. I am unable to reconcile the language of the stance with the simple fact that no further “withdrawal of accommodation” remains to be done since the repo rate has already been raised to the 6.5% level prevailing at the beginning of the previous easing cycle in February 2019,” he wrote.

“It is, of course, possible to undertake further tightening, but that would not constitute a “withdrawal of accommodation” by any stretch of the imagination,” he further said.