STOCK MARKET BSE NSE

Inflation worries trigger debate on RBI’s measures

Members flagged persistence in inflation during monetary policy meeting this month

Published: 21st August 2021 08:38 AM  |   Last Updated: 21st August 2021 08:38 AM   |  A+A-

A guard at RBI office

The Reserve Bank of India. (File photo | PTI)

By Express News Service

NEW DELHI:  The minutes of the Reserve Bank of India’s (RBI) August monetary policy committee (MPC) released on Friday shed light on growing disparity, with external members flagging discomfort given rising signs of persistence in inflation, though their near-term focus is on supporting growth.
Earlier this month, the committee voted to keep its benchmark rates on hold and vowed to maintain an accommodative stance “as long as necessary”. 

However, the sole dissenting voice Prof Jayant Varma, argued that low rates were actually fanning inflation. The RBI, he said, must start phased normalisation by raising the ultra-low reverse repo rate — which is currently at 3.35% — despite it not being within the mandate of the MPC in order to keep the repo rate at 4% for a longer period.

“I believe that the current level of the reverse repo rate is no longer appropriate. In my view, a phased normalisation would increase the ability of the MPC to keep the repo rate at 4% for a longer period, and this should in my view be a greater priority for the MPC than maintaining an ultra low reverse repo rate for some more time,” according to Varma.

Easy money today, the external member said, could lead to high interest rates tomorrow thereby not helping the recovery and the monetary accommodation appears to be stimulating asset price inflation to a greater extent than it is mitigating the distress in the economy.

“...a low long-term interest rate is more important for inducing investment-led growth than a low short-term rate,” Varma said, calling for a rise in reverse repo rate. MPC’s inflation target is 4% and not 6% or even 5%. For 2021-22, inflation is forecast to be well above 5%. “By creating the erroneous perception that the MPC is no longer concerned about inflation and is focused exclusively on growth, the MPC may be inadvertently aggravating the risk that inflationary expectations will be disanchored. In that scenario, rising risk premia could cause long-term rates to rise,” he noted.

The majority view, however, remained dovish. External members of the committee such as Ashima Goyal cautioned on the risks of inflation becoming more persistent from supply shocks even as RBI Governor Shaktikanta Das and Deputy Governor Michael Patra remained more focused on growth in their commentary.

3.35% The current reverse repo rate

4% The current repo rate

4% The inflation target of RBI



Comments

Disclaimer : We respect your thoughts and views! But we need to be judicious while moderating your comments. All the comments will be moderated by the newindianexpress.com editorial. Abstain from posting comments that are obscene, defamatory or inflammatory, and do not indulge in personal attacks. Try to avoid outside hyperlinks inside the comment. Help us delete comments that do not follow these guidelines.

The views expressed in comments published on newindianexpress.com are those of the comment writers alone. They do not represent the views or opinions of newindianexpress.com or its staff, nor do they represent the views or opinions of The New Indian Express Group, or any entity of, or affiliated with, The New Indian Express Group. newindianexpress.com reserves the right to take any or all comments down at any time.

flipboard facebook twitter whatsapp