“In June, I warned against declaring victory based on the inflation prints of just a couple of months, and expressed discomfort with the self-congratulatory tone of the MPC statement of that month about inflation having come inside the tolerance band. It is now clear that we would have a couple of months of inflation readings well above the tolerance band,” he said.
However, Varma clarified that the situation is not worth creating a panic. The trajectory of inflation over the next few quarters will unfold a clearer picture.
“On this basis, I continue to have the same cautious optimism that I had in the June meeting,” he added. The inflation print for July stood at 7.4 per cent, much above the expectations of economists and analysts.
Varma said that the continuing slowdown in China and rains in July are expected to keep a lid on commodity prices though there are continuing worries about the spatio-temporal distribution.
The MPC on August 10 unanimously decided to keep its repo rate unchanged at 6.5 per cent. While explaining his rationale behind the decision, Varma said, “Considering the balance of risks, I vote for keeping the repo rate unchanged in this meeting. I am of the view that the current level of the repo rate is high enough to bring inflation below the upper tolerance band on a sustained basis and also glide it towards the middle of the band.”The MPC also decided to remain focused on withdrawal of accommodation stance. Contrary to the other members of the MPC, Varma expressed reservations on this part of the resolution.”Turning to the stance, my reservations remain the same as in the past. However, this would be the third successive meeting at which the repo rate has been left unchanged. This disconnect between stance and action has completely hollowed out whatever meaning the stance might have originally had, and turned it into a harmless ritualism. So I am content with expressing reservations about the stance,” said Varma, as per the RBI minutes of the August MPC meeting.
