“Turning to the stance, I find that with every successive meeting, this stance is becoming more and more disconnected from reality. Based on the forecast inflation for 5.1 per cent for 2023-24, the real repo rate is now almost 1½ per cent. (The real short term rate could well be above that level since in recent weeks, many money market rates have often drifted towards the MSF rate of 6.75 per cent),” said Varma.
The MPC meet concluded on June 8, 2023. The Reserve Bank of India‘s (RBI) rate-setting panel had unanimously decided to keep the repo rate unchanged at 6.50 per cent. The MPC, with a majority of five out of six members, had voted to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.
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Varma said that the monetary policy is “dangerously close” to levels at which it can inflict significant damage to the economy.
“I have therefore seriously considered dissenting on this part of the resolution, but after careful thought I have decided to confine myself to expressing reservations on it. The main reason for not dissenting is 10 that, after two successive meetings at which the repo rate has been left unchanged, this stance now appears more vestigial than a serious statement of intent,” he added.
Growth and Inflation
While taking several high frequency indicators into consideration, Varma said that the outlook for growth remains more or less the same as in April. He suggested that the economic growth is likely to be lower than expected.
Varma said the outlook on inflation has changed only marginally as against April 2023. “The two inflationary risks that I spoke about in April (crude prices and the monsoon) have become a little less worrisome. On the crude oil front, it is now clear that OPEC+ is struggling to reduce supply adequately to counter sluggish demand, and the risk of a substantial spike in crude price in the near term is not very high,” he said.
The MPC member said that the official forecast of a normal monsoon has provided some comfort as far as inflationary risks are concerned, however, he mentioned that it is tempered by the fact that the forecast includes an almost even chance of monsoon being below normal or worse.
“Fortunately, the forecast likelihood of a deficient monsoon is only marginally higher than the climatological probability, and the chance of a drought appears to be rather remote. This augurs well because the Indian economy is quite resilient to a monsoon which is somewhat below normal if its spatial and temporal distribution is satisfactory,” a report by RBI quoted Varma as saying.
The RBI had retained its growth projection at 6.5 per cent for FY24. However, it marginally lowered the retail inflation projection to 5.1 per cent during FY24 from earlier estimate of 5.2 per cent.