Covid-19 is beginning to resemble a neutron bomb and the ability of monetary policy to mitigate a human tragedy of this nature is very limited, cautioned Jayanth R Varma, the lone member of the monetary policy committee (MPC) to vote against the accommodative stance at its meeting earlier this month.
While Varma, Professor, Indian Institute of Management, Ahmedabad, was on the same page as the other five MPC members when it came to keeping the policy repo rate unchanged at 4 per cent, he disagreed with them on the resolution to continue with the accommodative stance.
He observed that Covid-19 is beginning to look more and more like tuberculosis which kills a large number of people every year without inflicting major damage to the economy.
“The possibility that Covid-19 will haunt us (though with lower mortality) for the next 3-5 years can no longer be ruled out.
“Keeping monetary policy highly accommodative for such a long horizon is very different from doing so for what was earlier expected to be a relatively short crisis,” he said.
The Professor, in his statement, felt that the monetary policy is much less effective than fiscal policy in providing targeted relief to the worst-affected segments of the economy.
Varma felt that easy money today could lead to high interest rates tomorrow.
Reserve Bank Governor Shaktikanta Das said continued policy support with a focus on revival and sustenance of growth was the most desirable and judicious policy option at the moment. “The need of the hour is twofold: first, continue the monetary policy support to the economy; and second, remain watchful of any durable inflationary pressures and sustained price momentum in key components so as to bring back the CPI inflation to 4 per cent over a period of time in a non-disruptive manner,” he said.
Varma noted that while there is some comfort that inflation is forecast to be below the upper end of the tolerance band (6 per cent), it is important to emphasise that the inflation target for the MPC is 4 per cent and not 6 per cent or even 5 per cent.
Emphasising that he is conscious of the fact that the MPC’s mandate is supposed to be restricted to the repo rate, the Professor said: “I have for some time now being arguing that if the reverse repo rate does not fall within the remit of the MPC, then the announcement of this rate should be in the Governor’s statement and not in the MPC’s statement...”