Rate-setting panel member asks RBI to talk clearly for greater good

An outspoken member in India’s rate-setting body has criticized the central bank for being non-transparent about its policy intent and confusing the public with technicalities.

“The monetary policy committee should not be content with communicating to an ‘inside’ audience of regulated entities in a coded language, but should endeavor to communicate with the general public in as transparent a language as possible,” Jayanth Rama Varma, an external member in the Reserve Bank of India’s six-member panel, said in an interview via email.

The central bank left the key rate unchanged for a second straight meeting on June 8 and maintained its ‘withdrawal of accommodation’ stance as it tries to ensure the recent moderation in inflation continues. It wants to keep a close vigil on risks to inflation from uneven rains and geopolitical tensions, minutes of the MPC meeting showed Thursday.

Varma, who has expressed his reservations against the language of the stance for six straight policies since August last year, called it “more vestigial than a statement of intent”. The stance is losing relevance after the back-to-back hold and doesn’t truly reflect what MPC is actually doing or what it is likely to do in future, he said.

The RBI started withdrawing from its pandemic period accommodation in April last year. Some market watchers were expecting a switch to neutral stance in this month’s policy as inflation came closer to the target, while growth slowed amid a tighter policy and weakening global economy.

“The thinking appears to me that financial firms and professional forecasters understand the stance well enough and so there is no need to change it,” Varma said, who teaches finance at the Indian Institute of Management in Ahmedabad.

He favored a neutral stance, and “would be even happier with scrapping” it altogether, with individual MPC members providing projections of the future trajectory of the policy rate.

Here are some other points from the interview:

Varma warned real rates, or policy repo rate minus inflation, will rise to a “dangerous territory,” if inflation continued to decline. He is not suggesting “a cut in the real repo rate until inflation is projected to move close to the 4% target”

He defended the RBI’s growth projection of 6.5% for the current fiscal year, which differs considerably from the professional forecaster’s 6% view. “If all goes well, we may well hit or even surpass the forecast growth rate”

He expects inflation to be controlled by the lagged effect of the rate hikes, and supply side measures by the government, and also due to lagged effect of declining wholesale prices

Varma said a monsoon being 5%-10% below normal won’t be a challenge. “Also, a poor monsoon is as much of a growth shock (arising out of drop in rural demand) as it is an inflation shock”

India’s monetary policy is not dependent on the outcome of US Federal Reserve’s review, he said.. “The inflation situation in India is far more benign than in the US. So there is a great deal of monetary autonomy for India”