Jayant Varma ensures a return to normal


The minutes of the last MPC meeting released on Friday August 20 are likely to be some sort of benchmark: it could well be remembered as Jayant Varma’s minutes or more likely as the one that definitely did. a turn towards the normalization of the very accommodating monetary policy which has been in vogue since the COVID-19 blow in March 2020.

Dr. Varma’s arguments are compelling.

1. Covid is like tuberculosis, it kills people not so much the economy. The aim of monetary policy is not to alleviate human tragedies, but economic crises. Plus, for now, the pandemic looks like it could last 3 to 5 years, Varma says, pointing to the new wave in highly vaccinated Israel. So, if an ultra-accommodative policy can be justified to overcome the initial shock, can it be justified for 18 months? 2 years? is the question he poses on our plate.

2. Second, he points out that monetary policy has a uniform impact on the whole economy, but that Covid has hit certain sectors (like hospitality) and certain areas (like Kerala) and certain segments (like hotels) and certain segments (like hotels). MSME and weaker sections) more than others. Sector support can only be provided through fiscal policy.

3. Third, he says that monetary accommodation can actually create a problem by stimulating asset price inflation, which Mridul Saggar also alludes to when he points out the danger of markets being “determined to reduce the price. liquidity, conceived as a temporary crisis measure… “

4. Fourth, Varma says inflationary expectations may already be entrenched. He fears there is less confidence now that demand side pressures will remain subdued. Indeed, in a way, even Ashima Goyal, Mridul Saggar and Michael Patra point to the likelihood of inflation, and Patra calls it the price to pay for growth. Varma points out that even in the first quarter of fiscal 23, inflation is not expected to fall below 5%, revealing a lingering element in the price hike. The satisfaction that it is less than 6 percent is not enough, since the mandate is 4 percent.

Varma insists that the reverse repo rate of 3.35% is inappropriate and should be raised and brought closer to the reverse repo rate of 4%. Even at 4%, savers experience a negative real return of 1 to 1.5%; but at 3.35%, the negative real return is 2-2.5%, which is totally unwarranted, he says.

While it is true that neither the repo rate nor liquidity is in the hands of the MPC, such a sharp pullback by Varma cannot be ignored by the MPC or the markets. So it is very likely that short-term yields will start to rise from here, with the expectation that the best of accommodations are behind us and the RBI, if any, will advance its normalization schedule after the August MPC. .

The fact that normalization can begin very soon also enjoys the tacit support of Ashima Goyal and Mridul Saggar. “Gradual adjustments are possible under the accommodating position,” says Saggar, while Goyal says “other normalizations can begin even in an accommodating position,” a remarkable statement from one of the more accommodating members. .

It is therefore clear that the contours of the debate have shifted from whether standardization should start this year to when it should start. Now the questions are: will the RBI first cut cash, then increase reverse repurchase agreements? Can reverse repo be scaled up even with current liquidity? Can reverse repo be increased even with an accommodating position?

In addition, all this should delight the equity markets. Much like with global stock markets, the tapering discourse is actually good news as it recognizes growth, so rising overnight yields should actually boost stock markets as it shows the economy normalizes,


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