Mumbai The sole dissident of the Monetary Policy Committee said that the credibility of the Reserve Bank of India will be restored only when the rate of inflation is below 5%. in an exclusive interview with Mint, Jayant Verma said that the MPC will be judged by the results and not the promises made by it; Therefore, there is a need to bring down inflation below 5% quickly. Edited excerpt:
With this off-cycle rate hike in May, has the RBI achieved its inflation target credibility?
Credit will increase when the inflation rate comes down to, say, 5%. Only then can we say that we have done our job. Only then will the market and the public rely on the MPC to manage inflation. Till then we are just making promises. I think that will be judged not by the promises we make but by the results we deliver. We have started doing what is needed. I discharge the responsibilities of an MPC member with great humility. No one knows what will happen to inflation or growth. We need the humility to admit our mistakes and the willingness to correct course when we go wrong.
What is the real interest rate you see in the medium term?
No one knows the exact value of the neutral real interest rate, but I think it is probably between 0.5% and 1.5%. Right now, the uncertainty on the neutral real rate doesn’t matter as we are so far away from it. We are at -3%. There are two ways to get a positive real interest rate. One is to keep increasing the policy rate. If inflation is running at 8% and we increased the repo rate to 9%, we would get +1% real interest rate. The second and preferred way to get a positive real interest rate is to bring down inflation quickly, so that we need to reduce the repo rate. If we are able to bring inflation below 5%, we will already be close to a positive real interest, which is the front-loading argument. Front-load the hike, calm inflation and move toward a positive real interest rate, not through hiking rates, but through a reduction in inflation. It is important to look at the policy rate from the point of view of the real interest rate rather than the nominal interest rate.
Should the next rate hike be 60 basis points (bps) or 75 bps?
I said in my statement that we need more than 100 bps very soon. I haven’t mentioned the exact date or the exact quantity and I don’t want to do that right now. If we do more than 100 bps, we will get repo rate above 5%. If we bring inflation down too fast to around 5%, it will quickly move us away from a positive real interest rate. Once we have a positive real policy rate, we can switch to a calibrated approach. If we front-load now, we may only need fine-tuning beyond that. (However), not all members of the MPC believe in that view. If the MPC has six members, there are six views. Even though all six agree on a certain decision, we may agree on six different reasons.
Did you see the revised inflation forecast in May before deciding to hike rates?
My April statement indicated that in the absence of February guidance, we could have increased rates in April itself. We have in our hands that the February trend has more or less stopped the hiking rates. The entire market was expecting that we would remove the guidance in April and hike rates in June. But for this constraint, the data we had at the April meeting would have convinced me to vote for a rate hike. Coming into the May meeting, I didn’t need new data to vote for an increase. In any case, the May meeting happened too early to get a lot of new data. When we meet in June, we will have a lot more data from the second round of surveys on inflation expectations and professional forecasts, and also more high-frequency indicators on GDP and inflation.
When you met in April, you said that there has been a setback of development which cannot be ignored. By May, you saw this shock subside. Did you get more confidence to hike in May?
Yes; I changed my assessment of growth shock, but this reassessment would have affected only the amount of growth. In May I wrote that we need more than 100 basis points very soon. In April, my estimate of this number would have been lower, perhaps 75 bps. However, the need for a hike would have become quite clear in April. My suggestion of over 100 bps in May is coming from the assessment that the economy is holding up very well, but my vote for growth is not dependent on that.