You note in the latest MPC minutes that monetary policy is now dangerously close to levels which can inflict significant damage to the economy. Could you elaborate?
The objective of monetary policy is to control inflation with as little growth sacrifice as possible. The current real repo rate is close to 1.5% based on projected inflation 3-4 quarters ahead. At this level, there are worries about the extent of demand destruction that it will cause and the consequent damage to economic growth. There is therefore a need for fine tuning the monetary policy in the light of how inflation and growth unfold in the ensuing quarters to keep the real rate calibrated to the optimal level.
You mention your discomfort with the tone of the MPC’s statement, when it comes to the recent fall in inflation while saying that risks from crude prices and the monsoon are a little less worrisome. What are your key concerns on inflation?
My disagreement is with the self-congratulatory tone of that statement, and not with the fact that inflation has come down. First of all, if the MPC did not describe an inflation print of above 7% as being the consequence of its monetary policy, it should not make that attribution for a favourable reading. Second, monthly inflation data is very noisy and is driven by transient factors, and the MPC should not read too much into it. The MPC should be focused on longer-term projections for taking decisions.
You mention that the current repo rate is high enough to keep inflation below 6% and take it towards 4%. Given the significant growth-inflation risks you have flagged, what should the stance of the monetary policy be?I prefer a neutral stance. Even better would be to scrap the stance altogether in favour of individual MPC members providing projections of the future trajectory of the policy rate.You have pointed out that there have been recent occurrences of many money market rates drifting towards the upper band of the interest rate corridor. Is this an offshoot of the stance? Is liquidity management perhaps more of a monetary policy signal that changes in rates right now?
No. Liquidity management is not within the purview of the MPC, and the MPC stance therefore has no bearing on the liquidity management operations of the RBI. Liquidity management is an operational tool through which the RBI implements the policy rate decisions of the MPC. The tool should always be subservient to the policy target and not the other way around.