India inflation: There should not be 'intolerable growth sacrifice' to tame inflation abruptly: RBI's MPC member Jayanth Varma


The Indian economy has barely recovered from the impact of the coronavirus pandemic and it should be ensured that there is no “intolerable growth sacrifice” in attempts to tame inflation “too abruptly”, according to RBI‘s Monetary Policy Committee (MPC) member Jayanth R Varma.

With a cautiously optimistic outlook for the country’s economy, Varma on Sunday said growth prospects for 2022-23 and 2023-24 financial years are “reasonable” even after taking into consideration the possibility of a long-drawn-out period of geopolitical tensions and elevated commodity prices.

Amid inflationary pressures remaining high in recent times, the Reserve Bank of India‘s MPC is moving towards a hawkish stance, with the benchmark interest rate being hiked by 90 basis points to a two-year high of 4.90 per cent in a span of five weeks. A hike of 40 basis points was done earlier this month.

In an interview with PTI, Varma, an external member of the MPC, said the pandemic was the biggest test to the system so far, and the flexible inflation targeting regime proved itself equal to that task.

“The inflationary episode has lasted longer than we would have liked and will continue to last longer than we would like, but, I have no doubt in my mind that inflation will be brought down to the target level in the medium term.

“The Indian economy has barely recovered from the pandemic, and we have to be careful not to impose an intolerable growth sacrifice in our attempt to tame inflation too abruptly,” Varma said.

His comments also come against the backdrop of concerns raised in certain quarters that the central bank could have started hiking rates to fight inflation a little earlier. For the first time since August 2018, the MPC hiked the key interest rate by 40 basis points in early May.

The RBI has the mandate to maintain retail inflation at 4 per cent with a margin of 2 per cent on either side. The central bank’s six-member MPC headed by the RBI Governor decides on policy rates keeping this target in mind.

Varma, who is a professor of finance and accounting at IIM Ahmedabad, said he sees the risks to inflation as balanced at this point in time as both geopolitical and weather uncertainties could evolve in either direction.

“Financial conditions have tightened both globally and domestically, and this would help contain the emergence of demand-side pressures,” he said.

On inflation remaining high, Varma said there are multiple reasons, including the Russian-Ukraine war and supply shocks in food and other items, and added that supply-side issues have been more important than demand-side pressures.

“Part of the inflationary pressures are coming from global factors (crude oil, edible oil, and other commodities). Part of the shock is also arising from the effect of adverse weather conditions on domestic agricultural production,” he noted.

Retail inflation declined to 7.04 per cent in May but remained above the RBI’s upper tolerance level of 6 per cent for the fifth month in a row.

According to Varma, the global economy faces significant headwinds and it would be some time before the world gets back to high growth.

“But within this depressed context, I am cautiously optimistic about the Indian economy today…The economic recovery in India has been resilient in the face of the shocks created by the Ukraine war, and the growth prospects for 2022-23 and 2023-24 are reasonable even if we assume a long-drawn-out period of geopolitical tensions and elevated commodity prices,” he said.

In its third monetary policy of 2022-23, the RBI retained its GDP growth forecast at 7.2 per cent for the current fiscal but cautioned against negative spillovers of geopolitical tensions and a slowdown in the global economy.

For the current fiscal, World Bank has cut India’s economic growth forecast to 7.5 per cent.

The economy grew 8.7 per cent in the last fiscal (2021-22), whereas there was a 6.6 per cent contraction in 2020-21.


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