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India’s policy hawk sees end of aggressive hikes amid growth fears

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India’s most hawkish rate-setter said the policy rate was reaching a level that allows past aggressive action to cool without inflicting too much pain on the economy.

“I do hope that 6% will be sufficient to glide down toward the target, and in that case, 6% could be the terminal rate. It could also be a little higher,” Jayanth Rama Varma, an external member of the Reserve Bank of India’s monetary policy panel said in an email reply to questions.

Varma, who called on the more than a year ago to hike earlier than later, is now advocating for a pause after policymakers, in his view, had sufficiently raised by 190 basis points in four straight increases since May to bring the key rate to 5.9%. Raising borrowing costs further would impede capital investment that’s “absolutely essential” to fire up Asia’s third-largest economy, he said.

India, like others that joined the tightening trend relatively early, must balance the need to tame above-target while supporting the economy in the face of a global recession risk and a Federal Reserve that remains aggressive. The last month cut its economic growth outlook for the current financial year to 7% from a previous 7.2%.

“There is no free lunch,” Varma said of the higher rates “inflicting some degree of pain on the economy.” What’s needed, he said, was to keep the policy rate above neutral “for as long as needed to bring inflation down to target” and “as far above the neutral rate as the economy can tolerate without causing excessive disruption.” He said it was difficult to say what the neutral rate in India would be.


What he’s more certain about is that the full effect of India’s rate hikes on damping price pressures will take five to six quarters and there’s nothing policymakers “can do today about the inflation prints of the next couple of quarters” as monetary policy works with a lag. Inflation has stayed above the RBI’s 2%-6% target band for three quarters.

Other Highlights

The “possibility of another small hike cannot be ruled out” and “a pause is not a stop” as it suggests that the foot is on the brake and not the accelerator but ready to push down on the gas “when needed”

“A repo rate close to the neutral rate would reflect a balance between unacceptably high inflation and unacceptably low growth. By setting the policy rate at a level that is likely above the neutral rate, we are prioritizing inflation over growth”

“Countries like the US with a booming economy are in a very different situation from those experiencing inadequate economic growth. It is therefore natural that divergences will be more common going forward”


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