Jayanth R Varma, a crucial voice in India’s monetary policy landscape as an external member of the Reserve Bank of India’s Monetary Policy Committee (MPC), shared informed perspectives on the nation’s economic growth and inflation trajectory for the fiscal year (FY) 2025. In a conversation with HITESH VYAS and GEORGE MATHEW, Professor Varma, hailing from IIM Ahmedabad, imparted insights into the economic hurdles and monetary policy strategies that could shape India’s future.
Discussing the prospects for India in FY2025, Professor Varma underscored the achievability of the projected growth rate of 7%, albeit noting that some professional forecasters are leaning towards a slightly lower figure. However, he swiftly pointed out that achieving this rate is hardly sufficient under the current circumstances. He asserted that with India well behind on its pre-pandemic growth trajectory, combined with the advantageous ongoing demographic dividend, the nation’s growth should be at an even brisker pace.
When questioned about the imminent risks to India’s inflation and growth projections for FY2025, Varma cited geopolitical strains, climatic uncertainties, and the broader global environment as principal threats. However, the MPC’s assessment of risks being ‘evenly balanced’ offers a silver lining. Varma remains optimistic about the disinflationary path, bolstered by a potentially favorable monsoon that would alleviate food price spikes. This positivity extends towards inflation’s glide path towards the target figure, with transient food price shocks expected to remain just that—transient.
With the Indian economy currently buoyed by government investment, Varma turned to the significant costs he believes a high real interest rate can impose on economic progress. Emphasizing a need for private capital investment to reinvigorate growth, he warned against maintaining an overrestrictive rate that could stifle the private sector’s revival. His past votes for a reductive adjustment in the repo rate by 25 basis points in two consecutive meetings further underline his position on this issue.
Varma’s vote for a neutral stance on the withdrawal of monetary accommodation highlights a pathway for aligning inflation progressively to the 4% target. He reasoned that a real interest rate margin of 1-1.5% would be satisfactory for guiding inflation towards this figure and suggested that the currently higher real policy rate might be unnecessarily restrictive. As inflation forecasts point downward, Varma advocates for the nominal policy rate to be correspondingly reduced, preventing an unintended surge in the real policy rate.
Responding to the query on a potential initiation of a rate easing cycle from the second quarter of FY25—an expectation stemming from the Consumer Price Index (CPI) inflation anticipated to dip below 4% during the period—Varma maintained his personal stance favoring a cut. He refrained from predicting the full MPC’s trajectory, instead highlighting his unwavering viewpoint across the previous meetings.
When approached about the influence of global risks on India’s rate easing cycle, he conceded the volatility of the geopolitical scene but maintained that the current projections were not anchoring on worst-case scenarios. Equally, on questions regarding the relationship between RBI’s decisions and those of other major central banks, Varma confidently positioned India as an economy with enough autonomy to base its policies on domestic circumstances, without necessarily mirroring US strategy.
The recent spikes in crude oil prices and tensions in the Middle East were flagged as potential destabilizers for price stability. Yet, Varma noted that as of the interview, the market’s response to geopolitical developments had been subdued and not particularly alarming. Similarly, the exposure to the US 10-year treasury yield crossing 4.6% was seen primarily as an exchange rate impact, an area outside the MPC’s direct mandate.
Ultimately, Professor Varma highlighted the underlying issue in the rural sector—where high GDP growth rates have not translated into commensurate demand spikes. He postulated that a cumulative lag in growth stretching back to the pre-pandemic era is hindering a robust economic recovery that aligns with the pre-pandemic trend.
In conclusion, Varma’s measured discourse draws attention to the fine calibrations needed to harmonize India’s pressing growth ambitions with the imperative of maintaining inflationary guardrails, all staged against a backdrop of international uncertainty and domestic investment challenges.
