War against inflation not yet won, premature to declare end to tightening cycle: RBI MPC’s Varma

A member of India’s Monetary Policy Committee (MPC), Jayanth R. Varma, has said that it would be premature to declare an end to the tightening cycle and the war against inflation has not yet been won. Varma expressed reservations about the second resolution, stating that he could not put his name to a stance that he did not understand. He emphasized the need for heightened vigilance in the face of fresh risks such as an output cut by OPEC+ and monsoon-related issues. Varma also highlighted that a deficient monsoon could create inflationary pressures that would require counteracting with monetary policy measures

The war against inflation has not yet been won, and it would be premature to declare an end to the current tightening cycle, RBI’s Monetary Policy Committee (MPC) member Jayanth R. Varma remarked in his statement in the last MPC meeting, the minutes of which were released by the Reserve Bank on Thursday reveal.

Mr. Varma had expressed reservations on the second resolution, namely: “MPC decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target. While supporting growth, he wrote, “I cannot put my name to a stance that I do not even understand. At the same time, it is clear that the war against inflation has not yet been won, and it would be premature to declare an end to this tightening cycle.”

He observed there was need for heightened vigilance in the face of the fresh risks [an oil output cut by OPEC+ and monsoon-related] that have emerged.

Stating that the MPC has to keep a careful watch on the situation, he wrote: “If crude were to creep towards the triple-digit mark, there might be a need for a monetary response.”

Mr. Varma emphasised that a deficient monsoon would likely create inflationary pressures that would need to be counteracted with monetary policy measures. “We will however have to wait till May or even early June to have reasonable clarity on this matter,” he said.

“On the growth front, early warning signs of a possible slowdown are visible to a greater extent than in February. In the current situation of high inflation, monetary policy does not have the luxury of responding to these growth headwinds,” Mr. Varma wrote.

In fact, it is almost “axiomatic’ that monetary action can cool inflation only by suppressing demand. However, policymakers must be vigilant against overshooting the terminal policy rate, and thereby “slowing the economy” to a greater extent than what is needed to glide inflation to the target, he added.