Express View on RBI and interest rates: A dissenting note

In his statement, RBI Governor Shaktikanta Das also reiterated that even as inflation has fallen, “the target of 4 per cent CPI is yet to be reached and we have to stay the course.” However, in an interview to this paper, Jayanth Varma, member of the monetary policy committee, has said that “we are approaching the point where an interest rate cut is necessary to prevent an excessive real interest rate.”

He argues that the real interest rate of 2 per cent now is “excessive”, and that a “real rate slightly below 1.5 per cent is appropriate”. Varma has voted against the MPC maintaining its stance of remaining focused on the withdrawal of accommodation. Another MPC member, Ashima Goyal, has in the past indicated that a real interest rate of around 1 per cent is suited for the economy.

Any move to either change the stance of monetary policy or to cut interest rates will depend on the trajectory of retail inflation. If there is a sense of comfort that inflation is nearing the central bank’s target of 4 per cent, then Varma believes that monetary policy can be “less restrictive”. This opens up the space to cut rates. In its December meeting, the RBI had projected inflation at 5.6 per cent in the third quarter and 5.2 per cent in the fourth quarter of this year. For next year, it expects inflation at 5.2 per cent in the first quarter, 4 per cent in the second quarter and 4.7 per cent in the third quarter. However, there is some uncertainty over this trajectory of inflation, especially food inflation. While one-off food price shocks can be looked through, monetary policy, as Das has noted, “has to stay alert to the risk of such shocks becoming generalised and derailing the ongoing disinflation process”. The actions of the MPC must be guided by the objective of ensuring price stability.