Following the unscheduled meeting of the rate-setting panel, Reserve Bank of India Governor Shaktikanta Das announced a 40-basis-point hike in the repo rate.
In the minutes of the May 2-4 meeting, released Wednesday, Varma said that given rising inflation risks, it appeared to him that more than 100 basis points worth of rate hikes would need to be carried out very soon and that he therefore preferred a 50-bps hike.
“The majority of the MPC is in favour of 40 basis points for reasons which are not very clear to me. Whatever symbolic or psychological benefit there may be from keeping the hike below 50 basis points is outweighed by the simplicity and clarity of moving in round multiples of 25 basis points,” read his statement in the minutes.
Varma, a professor at the Indian Institute of Management, Ahmedabad, said that reducing the quantum of the rate hike by 10 basis points right now would require an extra 10-basis-point rate hike at some point – perhaps sooner than later, the minutes showed.
The MPC member, however, said in the minutes that he chose not to dissent on the issue as the optimal rate hike is not something that can be calculated with mathematical precision.
“I am thankful to the majority for not making my decision more difficult by choosing a 37.5 basis point hike (exactly mid-way between 25 and 50). In view of all this, I vote in favour of increasing the policy repo rate to 4.40 per cent.”
DELAYED ACTION
Varma has in the past dissented with other members of the rate-setting panel regarding the stance of the monetary policy.
He pointed out that in his statement in April; he had said that the key reason for not taking immediate action on the policy rate at the time was the forward guidance provided in the February meeting, which effectively ruled out such action.
In its February policy statement, the MPC had said that it had decided to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.
With inflation risks rising considerably following the Ukraine war, the MPC had dropped the forward guidance in April and said that it had decided to remain accommodative while focusing on withdrawal of accommodation.
“This (May 2-4) meeting is taking place almost a month after the April meeting, and the MPC is now at liberty to consider the rate increase that it could have done in April itself in the absence of the February forward guidance.”
STILL ACCOMMODATIVE POST HIKE
Despite the MPC raising the repo rate by 40 basis points, monetary policy remains extremely accommodative, Varma said in the minutes.
According to him, if the real policy rate were to be measured by subtracting the latest inflation print from the nominal rate, than the real policy rate after the May 2-4 meeting was actually lower than it was after the April meeting owing to the surge in inflation.
“Of course, it is more reasonable to calculate the real policy rate by subtracting the forecast inflation rate 3-4 quarters ahead, but even if one does that, it is obvious that the real policy rate continues to be sharply negative, and therefore highly accommodative.”
The MPC member said that there was a lot of catching up to do on hikes because the panel had rightfully prioritised growth at the height of the pandemic in 2020 and 2021 but delayed the normalisation of policy after the pandemic abated.
COMMUNICATION EFFICACY
Varma expressed hope that after the MPC’s rate hike in May, the rate-setting panel’s intent would be more clearly understood.
According to him, following the April policy statement, most analysts had interpreted the phrase “remain accommodative” as a stance despite the decision to drop the word stance.
In Varma’s portion of the minutes, he said that if the MPC’s intent was not clearly understood after the May meeting, the panel must consider rephrasing the resolution.
“It would not be wise for the MPC to persist with language that is pedantically correct, but falls short in communicative efficacy.”
The resolutions in both the April and May statements say that the MPC decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
