‘Whatever we’ve done or do in 2022 can only bring inflation down in mid-2023’: Jayanth R varma

Now that inflation has hit 7.4 per cent, do you think MPC has failed to check the retail inflation in the country?

There is no question that inflation has been unacceptably high for unacceptably long. Inflation has also been above 6 per cent for three consecutive quarters which is the statutory definition of failure. I do not wish to provide any excuses or justification for this unfortunate situation. However, it is important to note the reasons that have caused this problem. First, the MPC consciously (and I think correctly) prioritized economic recovery over inflation during the pandemic. Second, in my view, we persisted in this longer than we should have; normalization could have begun in mid-2021 when the pandemic had mutated into a health tragedy instead of an economic tragedy. Third, the supply disruptions from the Ukraine war created an unexpected inflationary shock that hit us before the MPC had normalized the monetary policy.

You had mentioned that the MPC should stop focusing on further tightening of repo rate and take a pause for now. Can you explain the reason for this view as inflation is yet to come down? Do you still hold this view?

The September inflation print of 7.4 per cent was along expected lines. No reasonable action that the MPC could have taken in mid-2022 would have been able to reduce this number, because monetary policy acts with long lags. The full effect takes about 5-6 quarters. The implication is that the only way to prevent 7 per cent inflation today would have been by aggressive tightening in the second half of 2021. Since we did not normalize interest rates till early 2022, we had already missed the bus when the Ukraine war started. Whatever we have done or may do in 2022 can only bring inflation down in mid-2023.

You seem to have diluted your earlier stance of tough policy action and statements against withdrawal of accommodation. Do you agree?

I have all along argued for early action and not for tough action. In fact, the purpose of early action is to avoid taking aggressive action later. As I wrote in my statement in August last year (14 months ago): “Easy money today could lead to high interest rates tomorrow.” I am glad that the MPC resorted to front-loaded rate hikes in 2022, and I believe that this aggressive action has opened up the window to pause.

When do you think the retail inflation will come down to the RBI’s comfort level of four per cent? Do you think rising interest rates will impact credit offtake, investments and growth in the country?

Monetary policy dampens inflation by reducing demand, and this necessarily means an impact on investments and growth. There is no free lunch. We must be very clear that aggressive tightening would impose an intolerable growth sacrifice. The problem is that we have still to return to the pre-pandemic trend line, and we have still not recovered from the growth slowdown that began four or five years ago. In this context, we need to bring inflation down to around 5 per cent very quickly, and then let it glide towards the 4 per cent target in a manner that avoids an intolerable growth sacrifice.

US Fed and developed economies are expected to raise rates further. How will India be impacted? There’s a view in some quarters that the rupee is not sliding but the dollar is strengthening. What’s your view?

My view is that we are witnessing a period of dollar strength and not rupee weakness. The dollar is rising against all major currencies in a manner reminiscent of the early 1980s. This is much less inflationary than rupee weakness because a strong dollar is historically associated with dampening of dollar prices of crude oil and other commodities. The low dollar price and the high value of the dollar offset each other to a great extent leading to less pressure on the rupee costs of commodities. The rising dollar could be painful for those Indian companies that have large unhedged dollar debt, but I think Indian companies have become more prudent after the bitter experience of the global financial crisis.