MPC member Varma expressed reservation on “withdrawal of accommodation” stance – The Hindu BusinessLine

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Says he is unable to reconcile the language of the stance

Jayanth R Varma, the only monetary policy committee (MPC) member to express reservation on the “withdrawal of accommodation” stance, said he is unable to reconcile the language of the stance.

In his statement at the last MPC meeting, the Indian Institute of Management, Ahmedabad professor, said: “Turning to the stance, I must confess that I fail to comprehend its meaning. My colleagues in the MPC assure me that the language is crystal clear to market participants and others. It may well be that I am the only person who finds it hard to understand.” 

Varma said he is 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 6.50 per cent level prevailing at the beginning of the previous easing cycle in February 2019.

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 added.

Varma said one interpretation that has been offered is that the real interest rate measured using the most recent published inflation rate needs to rise further. “This is doubtless true, but monetary policy should not be conducted by looking at the rear-view mirror. The real interest rate must be measured against the projected inflation rate 3-4 quarters ahead, and, as things stand right now, there is very little ground to argue for a further rise in the correctly measured real interest rate,” he added.

Moreover, even if a flawed definition of the real interest rate is accepted, the projected rise in this real rate would not require any action by the MPC; it would happen as a mechanical result of a falling inflation rate and an unchanged policy rate. And the projected fall in the inflation rate would be a consequence of what the MPC has already done, and not what it will do in coming months. “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.”

“There is need for heightened vigilance in the face of the fresh risks that I highlighted earlier in my statement. For these reasons, I refrain from dissenting on this part of the resolution, and confine myself to expressing reservations on it,” the IIM Professor said.


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