RBI's External MPC Member Sees End Of Aggressive Rate Hikes Amid Growth Fears

Jayanth Rama Varma is advocating for a halt after policymakers, in his view, had sufficiently raised by 190 basis points in four straight increases since May to bring the key rate to 5.9 per cent

An external member of the Reserve Bank of India’s (RBI’s) monetary policy panel said the policy rate was reaching a level that allows past aggressive action to cool inflation without inflicting too much pain on the economy, news agency Bloomberg reported on Tuesday.

Jayanth Rama Varma, one of India’s most hawkish rate-setter, said, “I do hope that 6 per cent will be sufficient to glide inflation down toward the target, and in that case, 6 per cent could be the terminal rate. It could also be a little higher.”

According to the Bloomberg report, Varma, who called on the RBI more than a year ago to hike earlier than later, is now advocating for a halt after policymakers, in his view, had sufficiently raised by 190 basis points in four straight increases since May to bring the key rate to 5.9 per cent. Raising borrowing costs further would impede capital investment that’s “absolutely essential” to fire up Asia’s third-largest economy, he said.

In the last monetary policy on September 30, Governor Shaktikanta Das announced a 50 basis point hike in the repo rate to 5.9 per cent.

The rates for the standing deposit facility (SDF) and the marginal standing facility (MSF) were also raised by 50 basis points to 5.65 per cent and 6.15 per cent, respectively.

The RBI also withdrew accommodative stance while supporting growth. Das had mentioned that the real GDP growth for FY23 is projected at 7 per cent.

India, like others that joined the tightening trend relatively early, must balance the need to tame above-target inflation while supporting the economy in the face of a global recession risk and a Federal Reserve that remains aggressive.

“There is no free lunch,” Varma said of the higher rates “inflicting some degree of pain on the economy.” What’s needed, he said, was to keep the policy rate above neutral “for as long as needed to bring inflation down to target” and “as far above the neutral rate as the economy can tolerate without causing excessive disruption.” He said it was difficult to say what the neutral rate in India would be.

What he’s more certain about is that the full effect of India’s rate hikes on damping price pressures will take five to six quarters and there’s nothing policymakers “can do today about the inflation prints of the next couple of quarters” as monetary policy works with a lag. Inflation has stayed above the RBI’s 2-6 per cent target band for three quarters.