Jayanth R. Varma, a member of the Monetary Policy Committee (MPC), had suggested that the RBI should raise the repo rate to 6% [rather than the 5.90% that was achieved by the MPC’s decision to raise the rate by 50 basis points] then pause to give key rates time to transmit, MPC September 28-30 meeting minutes.

“A pause is needed after this rise as monetary policy is acting with lags,” Varma reportedly said at the meeting, according to minutes released Friday. “It may take 3-4 quarters for the policy rate to transmit to the real economy, and the peak effect may take up to 5-6 quarters,” he added.

Stressing that it was dangerous to push the policy rate well above the neutral rate in an environment where growth prospects were very fragile, he said that if the level of economic output had returned to pre-pandemic levels , it remained well below the pre-pandemic level. trend line.

“If we increase the repo rate to around 6% at this meeting, that would represent a cumulative increase of around two percentage points in just four months. Even that underestimates the magnitude of the monetary tightening, because, there a few months ago, money market rates were close to the reverse repo rate (65 basis points below the reverse repo rate),” he postulated. “Taking this into account, the The total magnitude of monetary tightening would be well over 250 basis points,” Varma noted.

Stating that much of the impact of this major monetary policy action had yet to be felt in the real economy, he said much of the policy rate action had yet to be felt. yet been passed on even to the wider range of interest rates.

“For example, less than a third of the repo rate increase from April to August was passed on to retail bank deposit rates. Interest rates on bank deposits play a key role in stimulating savings, dampening consumer demand and thus mitigating inflationary pressures,” he stressed.

“We should hopefully see more of this transmission in the coming quarters. Although there was a much higher pass-through from policy rates to lending rates, the pass-through from lending rates to the real economy would also take time,” Varma said.

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Stressing that it is too early to know whether policy action so far has been sufficient or not, he said further tightening without a reality check would put the RBI at risk of exceeding the necessary repo rate. to achieve price stability.

“It is true that inflation is currently well above 6%. However, given that monetary policy acts with lags, what is relevant are inflation forecasts 3-4 quarters ahead,” he said.

“The RBI forecast and the survey of professional forecasters show that inflation will fall to around 5% in the first quarter of next fiscal year. Compared to this forecast, a policy rate of around 6% would not only be a positive real rate, but also probably higher than the neutral rate,” he added.

Mr. Varma also argued that since economic growth relies on the possibility of a revival of private investment in response to increased capacity utilization, the panel should “ensure that a rate of ‘unreasonably high real interest does not thwart this much-needed recovery’. of the investment cycle.

Reminding the panel that the statutory mandate limited the MPC to only consider the two factors of inflation and growth when setting interest rates, he said when seen in the context of the RBI having in the past (between 1998-2013) used interest rates to defend the currency to solve balance of payments problems, it had to be remembered that the legislator had deliberately chosen to let monetary policy be dictated by economic considerations internal ones and to let the external sector be managed with the help of other instruments.

“This means that the MPC cannot be guided by the effect of global monetary tightening on the interest rate differential,” he pointed out.

Mr Varma had voted against the second part of the MPC’s policy resolution, in which the panel said it remained ‘focused on withdrawing accommodation to ensure inflation remains within target going forward , while supporting growth,” arguing that the MPC should now pause rather than focus on further tightening.