He argued that the policy, which he believes is excessively restrictive, is sacrificing growth potential at a time when India’s economy could be accelerating.
Varma, an external member of the MPC, had voted for a cut in repo rate during the meeting which took place on August 6-8. The committee, however, decided to keep the policy rate unchanged at 6.50 per cent with a 4:2 majority.
India’s real GDP has been estimated to grow by 8.2 per cent in FY24 as against 7.0 per cent in FY23. Meanwhile, the MPC has kept the real GDP forecast for FY25 unchanged at 7.2 per cent with Q1 slightly reduced to 7.2 per cent; Q2 at 7.2 per cent; Q3 at 7.3 per cent; and Q4 at 7.2 per cent.
“For the last several meetings, I have been expressing concerns about the unacceptable growth sacrifice induced by a monetary policy that is excessively restrictive. The majority of the MPC however do not share this concern, perhaps
because they think that the Indian economy is already growing at close to its potential growth rate. I think that such a view reflects (a) an unwarranted pessimism about the growth potential of the economy and (b) an overly sanguine expectation about growth in ensuing quarters. I disagree with both prongs of this assessment,” Varma said as per the MPC’s minutes.
Jayant Varma, who had been voting for a rate cut since February this year, said that multiple policy measures, including digitalization, tax reforms, and increased infrastructure investment, have boosted India’s potential growth rate to at least 8 per cent.
Despite these favorable conditions, the RBI MPC member expressed concern that India’s projected growth rates for 2024-25 and 2025-26 are significantly lower than the economy’s potential.
“…And also well below what is needed at the current stage of our demographic transition to meet the aspirations of the new entrants into the workforce,” Varma added.
Professor Varma has time and again flagged the need to monitor that this growth opportunity is not squandered by maintaining excessively high real interest rates.
He argued that “hope is not a strategy” and called for a more realistic assessment of growth prospects.
“At the same time, the majority of the MPC is, in my view, too sanguine about growth in ensuing quarters. Data from various RBI surveys show multiple early warning signals that growth may be already slowing down. Expectations of robust growth depend heavily on an expectation that private capital investment will pick up soon. However, we have been hoping for this revival for many quarters now, and hope is not a strategy,” he said.