RBI’s Credibility at Risk Says RBI Monetary Policy Member
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The Reserve Bank of India (RBI) governor, Shaktikanta Das, focused on keeping rates low to support growth while stating that inflation, which has already breached the bank’s target range, will ease later this year.

The only dissenter amongst India’s monetary policy settlers is of the view that the RBI’s inflation-targeting credibility is at risk by focusing on the impacts of the COVID-19 pandemic and maintaining loose policy for too long.

Extracts of Interview with RBI Monetary Policy Member

Jayanth Rama Varma, a member of the RBI’s committee that decides on the key policy rates, stated in an interview this week that keeping an accommodative stance for too long will risk high-interest rates in future. He also noted that the RBI might have to do more later than it would have to do if it had acted early to maintain its credibility.

In August, Varma began voting against the MPC’s stance after expressing opposition to language about staying accommodative as long as necessary for supporting growth and mitigating the hit of COVID-19 while ensuring inflation remains within target.

Varma’s Take on COVID-19 and Reverse Repo

Jayanth Rama Varma, a finance professor at the Indian Institute of Management (IIM) at Ahmedabad, stated that it is time to ditch the COVID stuff from the monetary policy. He further noted that the trouble in the economy had got nothing to do with the pandemic. 

An accommodative monetary policy means there is a risk of only low growth and low inflation, which Varma thinks is not true anymore. He fears that we are risking falling behind the curve. He feels that the circumstances tomorrow might need a change in the policy rate, but the RBI has more or less stated they will not change the rate.

Verma stated that the RBI must maintain its freedom of action in the context of Russia’s invasion of Ukraine and the looming risks to the global economy. He feels that there is no certainty of what will hit the economy and from where. Therefore, he expressed discomfort about the RBI’s commitment to what it will do in the future.

On the take on RBI keeping its reverse repo rate unchanged at 3.35%, used to drain excess funds from leaders, while holding variable reverse repo rate auctions at 3.99%, Varma stated there was a disconnect between the RBI’s words and actions.

For any clarifications/feedback on the topic, please contact the writer at mayashree.acharya@cleartax.in.

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