India’s Monetary Policy Committee (MPC) must proactively act to stimulate private investment by lowering interest rates, Jayanth Varma, an external member of the rate-setting panel, said to Bhaskar Dutta.
Varma, who recently said that “hope” cannot be a strategy to bring about private investment, emphasised that lower real interest rates would improve demand conditions, lower cost of financing and thus help in bringing about the long sought after private spending.
Edited excerpts:
Referring to expectations of a pickup in private capital investment, you have said that “hope is not a strategy”. Are we still some distance away from a meaningful recovery in private investments?
When I say that “hope is not a strategy”, what I mean is that we must take proactive measures to stimulate investments. The most important thing that the MPC can do is to reduce the real interest rate from its current excessive level. This would improve demand conditions which are a major driver of investment decisions and would also lower the cost of financing the investment.
You have repeatedly spoken of India’s potential growth rate and the need to create conditions that are conducive for achieving that rate. What gives you the confidence that the trend line of inflation would remain downwards and therefore justify easier monetary conditions?
I believe that a real interest rate of 1.5% is sufficiently restrictive, and does not constitute loose monetary policy by any means. While the nominal repo rate has been steady at 6.5% for a year and a half, the real repo rate has risen as inflation fell. This passive tightening of monetary policy needs to be reversed.
You have expressed reservations about the favourable view on economic growth in ensuing quarters that is held by the majority of the MPC. You have also referred to various RBI data surveys that point to slowing growth. Could you elucidate on the specific data points you are concerned about?
There is some evidence of softening of sales and profits of the listed private manufacturing companies in the first quarter of 2024-25. High frequency indicators show mixed signals. Moreover, there has been a decline in consumer confidence and in the business expectations index.
You have in the past expressed strong reservations about the ‘withdrawal of accommodation’ stance of monetary policy. With the RBI now tolerating surplus liquidity conditions in the banking system for two months, what does that indicate for the stance?
I have long been in favour of dropping the stance completely, as there is no clarity on what it means nor what it is intended to mean.
As your term at the MPC draws to a close, how would you describe the experience as a policymaker? Your term witnessed unprecedented shocks in the form of Covid, aggressive US rate hikes and wars across the globe. Are there any improvements in the policymaking process that you would recommend, going ahead?
It has been a great privilege to have served on the MPC during these challenging times. I believe that flexible inflation targeting has been a useful tool to deal with unexpected shocks of various kinds. I also believe that dissent is an integral part of a healthy MPC. All in all, I am quite happy with my experience, and have no changes to suggest.
