Monetary policy dangerously close to damaging the economy: MPC member Jayant Verma

Full impact of repo rate hike is still unfolding, says guv Das

The Monetary Policy Committee’s stance is becoming more and more disconnected from reality and the central bank’s monetary policy is now “dangerously close” to levels at which it can inflict significant damage to the economy, a member of the Reserve Bank of India’s rate-setting panel Jayanth R Varma has said.

In his statement at the Monetary Policy Committee (MPC) meeting held June 6-8, Varma said, “monetary policy is now dangerously close to levels at which it can inflict significant damage to the economy. Despite this, the majority of the MPC wishes to remain focused on withdrawal of accommodation whatever that phrase might mean.” The MPC released the minutes of that meeting on Thursday.

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“I have therefore seriously considered dissenting on this part of the resolution, but after careful thought, I have decided to confine myself to expressing reservations on it,” Varma noted in his statement as per minutes of the MPC meeting released by the RBI on Thursday.

In its second meeting for FY24 held on June 6-8 June, the six-member MPC unanimously decided to keep the policy repo rate unchanged at 6.5 per cent. With a majority of five out of six, the MPC also decided to remain focused on the withdrawal of accommodation.

Varma, who is a professor of finance at the Indian Institute of Management (IIM) Ahmedabad, had earlier expressed reservations over the aggressive tightening in the monetary policy saying it would hurt economic growth.

“Turning to the stance, I find that with every successive meeting, this stance is becoming more and more disconnected from reality. Based on the forecast inflation for 5.1 per cent for 2023-24, the real repo rate is now almost 1.5 per cent,” Varma said.

Another external member of the panel, Ashima Goyal, also highlighted the need to ensure that the real repo rate does not rise too high and damage the economic growth cycle.

However, defending the MPC action, RBI Governor Shaktikanta Das said, “The pause in April MPC was based on the need to assess the cumulative impact of 250 bps rate hike over the past one year. Our surveys indicate that anchoring of expectations is underway and our monetary policy actions are yielding the desired results.”