RBI should cut interest rates soon- Jayanth Varma

RBI should cut interest rates soon: Jayanth Varma

The Reserve Bank of India (RBI) should reduce nominal interest rates soon to prevent an excessive rise in real interest rates, says monetary policy committee’s external member Jayanth Varma. He tells Ajay Ramanathan that a potential deterioration in the global economy and geopolitical volatility are major risks to growth in 2024. Excerpts:Q. Do you believe that RBI has overplayed the necessity of a stance in the current circumstances?

A. First, I do think that a stance is of limited utility when monetary policy decisions are data dependent. Announcing a stance in such situations creates the risk that at a future meeting, the policy makers have to choose between either conforming to the stance by postponing a necessary action, or taking an action that contradicts the stance. A stance is most useful when providing a time based forward guidance, as for example in 2020 during the pandemic. That is why I do not see the need for a stance at this juncture.

Q. What gives you confidence that the inflation can be brought within the 4% target?

A. Globally, the inflation surge was the result of excessively loose pandemic-era monetary policy followed by multiple supply shocks. Neither of these factors operate today. Monetary policy is now restrictive, supply shocks have dissipated and prices of energy and commodities have corrected. As such I expect inflation to trend downward towards the target (apart from transient food price spikes). All that is required is to maintain a restrictive monetary policy for an extended period of time to allow for a gradual non-disruptive disinflation.

Q. Come 2024, what are the key monitorables as far as growth is concerned?

A. The risks of global slowdown and geopolitical volatility are the major risks to the growth outlook. At the current juncture, these risks appear to be manageable, but we must be alert to any sign of further deterioration in the global economy. Moreover, monetary policy should strive not to allow high real interest rates to choke off growth.

Q. While RBI has maintained focus on ‘withdrawal of accommodation’, would it be correct to say that we are at the end of rate hikes?

A. Yes, I do think that interest rates have peaked in India, and that nominal rates will have to be cut soon to prevent an excessive rise in real interest rates as inflation trends downward.

Q. Are we likely to see a rate cut in 2024? What factors will influence this?

A. I think we are close to the point where interest rates have to be cut to prevent an excessive real interest rate. I would not like to specify a more precise time frame, but as I mentioned in my statement, all that is needed is firmer evidence supporting the current projections of a sustainable fall in inflation.