Stating that the MPC needs to watch developments carefully, Jayanth Verma wrote: “Should crude move closer to the triple digit mark, a monetary response may be required.” | Photo credit: PUNIT PARANJPE
The war on inflation has not yet been won, and it would be premature to declare an end to the current tightening cycle, noted RBI Monetary Policy Committee (MPC) member Jayanth R. Varma in his statement at the last MPC meeting, the minutes of which were released by the Reserve Bank on Thursday reveal.
Mr. Varma had reservations about the second resolution, namely: “MPC has decided to remain focused on the withdrawal of accommodations to ensure that inflation gradually aligns with the objective. While supporting the growth, he wrote, “I can’t put my name to a position I don’t even understand. At the same time, it is clear that the war against inflation is not yet won and it would be premature to declare the end of this tightening cycle.
He observed that it was necessary to redouble our vigilance in the face of new risks [an oil output cut by OPEC+ and monsoon-related] who emerged.
Stating that the MPC needs to monitor the situation carefully, he wrote: “If crude were to approach the triple digit mark, a monetary response may be required.”
Mr. Varma pointed out that a deficient monsoon would likely create inflationary pressures that would need to be countered by monetary policy measures. “We will however have to wait until May or even early June to have reasonable clarity on this issue,” he said.
“On the growth front, the harbingers of a possible slowdown are more visible than in February. In the current situation of high inflation, monetary policy does not have the luxury of responding to these headwinds to growth,” Mr. Varma wrote.
In fact, it is almost “axiomatic” that monetary action can only cool inflation by suppressing demand. However, policymakers should be vigilant against overshooting the terminal policy rate, and thereby “slowing down the economy” to a greater extent than necessary to drag inflation towards target, he added. .
On the position, he said: “I must confess that I do not understand its meaning. I fail to reconcile the language of the position with the simple fact that there is no more “accommodation withdrawal” left to do since the repo rate has already been raised to the 6.5% level prevailing at the start of the previous easing cycle in February 2019,” he wrote.
“It is of course possible to undertake further tightening, but that would not constitute ‘withdrawal of accommodation’ by any stretch of the imagination,” he added.