‘The markets should not assume we will guide them, because the data is coming without warning’, said Varma
Jayanth R Varma, member, Monetary Policy Committee
Jayanth R Varma, part of the six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), says the committee’s hands are not tied because there is no forward guidance on the stance of monetary policy. In an interaction with Manojit Saha, Varma says the markets should prepare for action, which could be in either direction — it could be to support growth or to address inflation — as these are uncertain times. He also says missing the inflation mandate is a possibility. If the RBI misses the mandate, the law requires the central bank explain to Parliament why the mandate is missed and steps being taken to address the issue. Edited excerpts:
The MPC minutes show inflation is a concern following the sharp rise in crude oil prices due to the Russia-Ukraine war. Most of the MPC members sounded cautious on growth too. Does it mean rate increases may not be as aggressive as the markets are expecting — like four to six over the next one year?
We have to be data-driven on this. There are big uncertainties on both growth and inflation. I think the most important thing is, we are not giving any guidance now. There is no further guidance, and we are free to act as necessary.
The consumer price index (CPI) rate was above 6 per cent in the January-March quarter, and it is expected to stay above 6 per cent in April-June, according to the RBI forecast. The forecast for July-September is 5.8 per cent. Do you see a possibility that the RBI misses its mandate to keep average inflation in the 2-6 per cent range for three consecutive quarters?
Yes, that could happen. And we hope that does not happen. We would want to act so that it does not happen. But that is a possibility.
What steps can be taken to avoid such a situation?
That is for the future. What my statement said is in the April meeting our hands were tied by the forward guidance we had given in February. We could not take any action in April because we have guided the markets that we will not act … more or less … we had said that. And the April statement is saying our hands are not tied anymore. And the markets should pick up that signal that the MPC now has a free hand.
Do you think the MPC can return to the original mandate of targeting 4 per cent CPI inflation during its term?
I think it should, and it will. Because everybody is conscious about the mandate. Everybody is conscious that the Covid pandemic was an extremely unusual thing and we made deviations to account for that. Everybody is clear that there is a mandate and we have to bring inflation around 4 per cent. The question is how quickly we can do it. But we will get there.
The March consumer inflation rate was close to 7 per cent. Since the MPC meeting was much before the inflation number announcement came, does it change your perception on the inflation trajectory?
I don’t think so. At least I was prepared for a high rate… I mean nobody was forecasting 7 per cent.
The point I was driving home in the last several meetings is that the forecast errors have become very large. Both on growth and inflation we are seeing forecasts, not only of the RBI but also of professional forecasters … everybody is making forecast errors of +/- 1 per cent. And therefore, we should take that into account. That is why we are saying the markets should be prepared for action also, which could go in any direction. The markets should not assume we should guide them because the data is coming without warning. If we in the MPC are not getting adequate warning signals about what is coming, how can we give warning signals to the market? We cannot. The only warning we can give is that we are living in an uncertain environment, and the shocks have been very large, further shocks are possible, and therefore you should expect to get surprised.
In the MPC minutes you said, “Coming to the ‘stance’, I think it is wholly appropriate that this word has been dropped from the resolution”. Can you shed some light on what the implication of this is? Does this mean the MPC will have some element of surprise?
The word “stance” is not there now. I don’t think it in terms of surprise — I think in terms of speed and agility in decision making. We must have the freedom to act quickly. We don’t know what the shocks are going to be… we could get inflation shocks, more growth shocks… Therefore, we should be able to act quickly. That is the main reason why I think getting rid of forward guidance is a good idea. If the data produces surprise, the monetary policy has to respond to the surprise.
But the MPC resolution said the RBI was accommodative…
Of course we are accommodative. A negative real interest rate is accommodative. A neutral interest rate should be 5-6 per cent or more. We are far below the neutral rate. So “accommodative” today is talking about the present, we are not talking about the future. “Accommodative” is not a signal about what we do in the next policy meeting.
Do you see real interest rate becoming positive?
It will happen — the question is when. Because negative real interest rate is an abnormal situation. It was in response to the pandemic. But that is not a stable, sustainable situation. We would have to make the real interest rate mildly positive. The question is how quickly.
Do you think open market operations are required to support the large government borrowing programme for the current fiscal year?
I would not like to comment on that. The RBI, not the MPC, is the debt manager.