'MPC's inaction may drive real rates over 1.5%'

The Reserve Bank of India’s monetary policy is excessively tight as the optimal real rate is probably closer to 1% than 1.5%, said Jayanth Varma, an external member of the monetary policy committee (MPC).

- Gopika Gopakumar

MUMBAI: In an interview, Varma explained that as inflation falls as projected in the next three to four quarters, real rates will rise, and therefore maintaining a pause could effectively mean tightening. Edited excerpts:

You mentioned in the minutes that with every successive meeting, the stance is becoming more and more disconnected from reality. What should the stance be, according to you?

If there is to be a stance at all, it should be a neutral stance since the risks are now evenly balanced. In the past, I have argued for replacing the stance with projections by individual MPC members of the future trajectory of the policy rate, and I would make the same recommendation now as well.