Impact of monetary policy tightening on inflation to be felt after 5-6 quarters, says RBI’s Monetary Policy Committee member

RBI Monetary Policy Committee (MPC) member Jayanth R. Varma on October 17 said that the impact of monetary policy tightening on inflation will be felt after five to six quarters.

The Central bank is mandated to keep inflation at 4% with 2% of upside and downside margins.

In order to control rising inflation, the RBI on September 30, has raised short-term lending rate for the third consecutive time by 50 bps to take the repo rate to 5.9%.

Since May it has cumulatively increased the key interest rate by 190 bps.

“No doubt it (inflation) will come down. Because we have done monetary policy tightening.”

“That tightening will have its impact. The monetary policy takes, you know, five to six quarters to have its impact and cool prices,” he told PTI in a telephonic interview.

India’s consumer price index (CPI) based inflation in September rose to five-month high of 7.41% from 7% recorded in the preceding month, with the print remaining well above the upper tolerance level of RBI’s inflation targeting framework for the ninth consecutive month.

“We started only in April. We will start seeing the effect of that tightening later in the year.”

Mr. Varma, currently a professor of Indian Institute of Management (Ahmedabad),  noted that India’s economic growth has actually been depressed for many years now.

“We are not fearing recession to say but growth is not what we would like,” Mr. Varma said.

The World Bank on October 6 projected 6.5% growth rate for the Indian economy for 2022-23, a drop of one percentage point from its June 2022 projections, citing deteriorating international environment, while IMF projected a growth rate of 6.8% in 2022 as compared to 8.7 % in 2021 for India.

“So, that is the dual challenge. Economic growth is below what we would like, inflation is higher than what we would like, and that poses a difficult challenge for the monetary policy,” the eminent economist emphasised.

He said that the Monetary Policy Committee is prioritising inflation right now, and trying to bring inflation under control and then move from that.

IMF chief Kristalina Georgieva has said the global economy is moving from a world of relative predictability to one of greater uncertainty.

On the Indian rupee touching a historic low, Mr. Varma pointed out that the U.S. dollar is strengthening against almost every currency.

Noting that the U.S. economy is doing pretty well, he said that the combination of economic growth plus tight monetary policy will tend to appreciate the dollar, “which is what we have seen in the past as well”.

“The danger is much higher when the rupee is weak than when the dollar is strong,” he said.

When asked whether RBI should defend the rupee, he said his personal view is that “how you deal with when the dollar strengthens is different from how you deal with when the rupee weakens. They are two very different phenomena which require different responses”.

Finance minister Nirmala Sitharaman has also said that the rupee has not weakened but it is the dollar that has strengthened, as she defended the 8% slide in the value of Indian currency against the greenback this year.

The rupee is hovering around 82.30 against the U.S. dollar.

Some analysts say the central bank may have spent nearly $100 billion in the past year to defend the rupee.