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RBI MPC Outcome : Monetary policy committee member Jayanth Varma dissents on RBI's accommodative stance

RBI MPC Outcome : Monetary policy committee member Jayanth Varma dissents on RBI's accommodative stance

The monetary policy committee (MPC) member Prof. Jayanth R. Varma has once again expressed his reservations on continuing with the accommodative stance of providing ample liquidity in the financial market.

Prof. Jayanth R. Varma, an IIM -Ahmedabad professor, is one of the six members of the RBI Monetary Policy Committee (MPC). Prof. Jayanth R. Varma, an IIM -Ahmedabad professor, is one of the six members of the RBI Monetary Policy Committee (MPC).

The monetary policy committee (MPC) member Prof. Jayanth R. Varma has once again expressed his reservations on continuing with the accommodative stance of providing ample liquidity in the financial market.

Varma, an IIM -Ahmedabad professor, is one of the six members of the committee. The committee is mandated to set the interest rates in the country while targeting an inflation rate of 4 per cent with a lower and upper band of 2 to 6 per cent.

The remaining five members, which also includes three RBI representatives, voted to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target going forward. 

Also Read: RBI MPC meeting: GDP growth retained at 9.5% for FY22

Clearly, Varma is rooting for a neutral stance, which means keeping the system at a marginal surplus. Currently, the daily average surplus liquidity is in excess of Rs 8 lakh crore. The surplus liquidity in the system has the potential to fuel inflationary pressure though RBI has been absorbing the liquidity through various tools. 

Varma had earlier argued that the COVID-19 pandemic has mutated into a human tragedy rather than an economic crisis, and monetary policy is not the right instrument to deal with this. "The ill effects of the pandemic are now concentrated in narrow pockets of the economy, and monetary policy is much less effective than fiscal policy for providing targeted relief to the worst affected segments of the economy," he had noted in the October policy.

He is also of the view that "inflationary pressures are beginning to show signs of greater persistence than anticipated earlier." 

In fact, the US Federal Reserve, which had for long dismissed the inflationary pressure as being 'transitory' because of supply-side shocks post-COVID, is now singing a different tune. The Fed chairman Jerome Powell has recently said that it is time now to retire the word 'transitory.'

Also Read: RBI MPC meeting: Repo rate unchanged at 4%

The US retail inflation is already above the 2 per cent average targeted by the central bank. 

The RBI, however, has retained its CPI inflation forecast at 5.3 per cent in 2021-22.  "Supply-side interventions by the Government have limited the fallout of continuing high international edible oil prices on domestic prices. Though crude oil prices have seen some correction in the recent period, a durable containment of price pressures would hinge on strong global supply responses to match the pick-up in demand as pandemic restrictions ease," said governor Shaktikanta Das in his statement.