Monetary policy dangerously close to damaging economy: MPC member

Mumbai, June 22

Sounding a note of caution, RBI’s rate-setting panel member Jayanth R Varma opined that monetary policy “is now dangerously close” to levels at which it can inflict significant damage to the economy, revealed the minutes of the June MPC released by the RBI on Thursday.

Divergent opinion

While the RBI kept the key short-term lending rate steady for the second time in a row, the minutes showed there were differences among the members of the six-member monetary policy committee (MPC) about the future course of rate hikes as it could impact the ongoing economic recovery.

While the RBI kept the key short-term lending rate steady for the second time in a row, the minutes showed there were differences among the members of the six-member monetary policy committee (MPC) about the future course of rate hikes as it could impact the ongoing economic recovery.

“…monetary policy is now dangerously close to levels at which it can inflict significant damage to the economy,” said Jayanth R Varma, who is a government-appointed member on the panel. He is a professor at the Indian Institute of Management, Ahmedabad.

RBI Governor-headed MPC consists of three members from the central bank and three government nominees.

Varma said with every successive meeting, the monetary policy stance is becoming more and more disconnected from reality.

External member Ashima Goyal, as per the minutes, said the quick succession of repo rate raises has brought the real rate to near equilibrium levels, which has prevented overheating and over-tightening of demand and helped to anchor inflation expectations. The slowdown and pause were also well-timed.

“As expected inflation falls, however, it is important that real repo rate does not rise too high,” she said.

While voting for status quo in interest rates along with the other five members, RBI Governor Shaktikanta Das said monetary actions have brought retail inflation within the target band (2-6%), but the job is only half done.

As per the minutes of the MPC meeting held from June 6 to 8, Das said India’s macroeconomic fundamentals are strengthening and growth prospects are steadily improving and becoming broad-based.