NEW DELHI: Even when the Reserve Bank of India decided to maintain accommodative stance to focus on growth, its external member Jayant R Varma voted against accommodative stance, arguing that risk to inflation and growth is more aggravated and beyond the control of monetary policy committee.
“I am not in favour of the decision to keep the reverse repo rate at 3.35%, and vote against the accommodative stance. Raising effective money market rates quickly towards 4% would demonstrate the MPC’s commitment to the inflation target, help anchor expectations, reduce risk premia, enhance macroeconomic stability, and allow lower long-term interest rates to be sustained for longer thereby aiding the economic recovery,” Jayanth R Varma said in the MPC minutes released on October 22.
He added that ill effects of the pandemic are now concentrated in narrow pockets of the economy, and monetary policy is much less effective than fiscal policy for providing targeted relief to the worst affected segments of the economy. He also raised concern over inflationary pressures, which are beginning to show signs of greater persistence than anticipated earlier.
“Both of these risks — one to inflation and the other to growth — are well beyond the control of the MPC, but they warrant a heightened degree of flexibility and agility. A pattern of policy making in slow motion that is guided by an excessive desire to avoid surprises is no longer appropriate,” said Varma. While all members, except Varma, voted for the accommodative stance, the concerns over rising fuel cost and its spillover on other segments and rising commodity price was underscored by most of the members.
According to Mridul K Saggar, rising energy cost can raise inflation by 15-20 bps and also lower growth.
“In my assessment, the probability that oil prices may touch or cross $85 per barrel before the year ends and could average $80/barrel or more in H2 are not insignificant. It can have significant impacts that are hard to precisely quantify due to non-linearities and uncertainties...,” Saggar said.
Members flag fuel cost: MPC minutes
While all members of the RBI panel, except its external member Jayant R Varma, voted for the accommodative stance, the concerns over rising fuel cost and its spillover on other segments and rising commodity price was underscored by most of the members.