Inflation Easing But Still Unacceptably High, Members Reaffirm


Inflation is at unacceptably high levels, and the projected trajectory is also above target during the entire forecast horizon, MPC member Jayanth R. Varma said. Economic growth has, on the other hand, proved resilient in the face of an adverse global environment.

“In this situation, there is clearly a need for frontloaded hikes in the policy rate. The choice to my mind is between 50, 60 and 75 basis points.”

The logic of frontloading argues in favour of a 75 basis point hike: it would establish the credibility of monetary policy beyond doubt, would help achieve a faster reduction in the inflation rate, and would hopefully reduce the terminal repo rate consistent with bringing inflation close to the target, Varma argued.

Weighing against that is the fact that a 75 basis point rate hike is quite unusual (despite a few recent hikes of this magnitude globally in the recent period). In the context of market expectations of a 35-50 basis point hike, such a large hike risks being misinterpreted as a sign of panic, and could be unnecessarily disruptive, he said.

Also, even with a 50 basis point hike this month, the cumulative tightening in the past few months of 140 basis points would make the real interest rate positive based on projected inflation 3-4 quarters ahead.

“On balance, therefore, I do not favour a 75 basis point hike at this juncture,” he said. The choice between 50 and 60 basis points is less clear cut.

On the resolution to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth, “this statement confuses more than it clarifies”, he said.

Because the rate hike in this meeting takes the policy rate above the pre-pandemic level, “withdrawal of accommodation” cannot refer to the withdrawal of the pandemic era accommodation. It can only mean withdrawal of the pre-pandemic accommodation that began with the rate cut from 6.50% to 6.25% in February 2019. A plain reading of this resolution would then be that the MPC is focused on taking the repo rate back to 6.50%.

“In my view, such an indication of a terminal repo rate of 6.50% is totally unwarranted in the situation that we are in.” It is easy to imagine that a few months from now, the economic data could point to a terminal repo rate that is well below 6.50%, Varma said.

“To focus on one thing implies paying less attention to other things, and I do not think it would be wise to say that the MPC will remain “focused” on withdrawal of accommodation ignoring other considerations.”

“I do not wish to record an outright dissent on this resolution because clearly further withdrawal of accommodation is warranted,” Varma said. The terminal repo rate may or may not be 6.50%, but it is almost certainly well above 5.40%.


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