The ongoing phase of high inflation will not last beyond a few months as monetary policy is tight enough to keep food price shocks from feeding into broader price pressures, said Jayanth Varma, external member of the Monetary Policy Committee (MPC). In an interview to Bhaskar Dutta, he said India’s economy, however, faces a key risk from slower growth worldwide. Edited excerpts:
How high is the risk of inflation spillovers? Food prices could face more upward pressure as the rains in August have been weak.
I believe monetary policy is restrictive enough to ensure that food price spikes do not lead to generalised inflation. I am, therefore, quite confident that the current phase of high inflation would be limited to a few months.
In June, while referring to the stance, you had said that monetary policy was dangerously close to levels that could significantly harm growth. In the latest minutes, you said the stance is harmless ritualism. What has changed?
The decision of the MPC to look through the current inflation spike has reduced my fears that the MPC might translate its tough talk into an actual rate hike. That is why I refer to it as harmless ritualism.
You mentioned the continuing slowdown in China. Are there downside risks to the GDP forecast of 6.5% for India, given the faltering global environment?
I do think that the external environment remains a key risk to the growth outlook. We should, therefore, continue to monitor growth outcomes carefully over the next few months.
The RBI took the decision on CRR (cash reserve ratio) citing inflation risks stemming from excessive liquidity. Is there a case for liquidity management to also fall within the MPC’s ambit?
Liquidity management is merely a part of the operational toolkit for implementing monetary policy. I do not see any reason for the MPC to worry about liquidity management unless it operates at cross purposes to monetary policy, and right now liquidity management and monetary policy are well aligned.
The RBI has expressed comfort from the fall in core inflation. Do you see that trend sustaining? By when could we see headline CPI (Consumer Price Index) closer to the 4% mark?
The tightening that has been effected since May last year is still working its way through the system and this is expected to maintain downward pressure on core inflation over the next several quarters. The declining core inflation will also feed into a reduction in headline inflation over a period of time.
