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00:00Welcome back. You're watching Profit Insights. We're now joined by Jayantar Varma, External
00:14Member of the Monetary Policy Committee. Mr. Varma, thank you so much for taking time out
00:18for us.
00:19Oh, my pleasure.
00:20So, you know, to begin with, from your latest minutes, and that's something that you've
00:25been saying for a while, you know, what stands out is that you sort of talk about the growth
00:31sacrifice that's taking place because of not cutting rates at the correct juncture, and
00:38also the fact that in Q1, for instance, we are seeing very visible signs of slight weakening
00:44in growth. So, could you elaborate a little bit more on that, the growth sacrifice as
00:49well as weaker growth that we're seeing in Q1?
00:52You see, growth, one has to look at, there are two ways to look at growth. One is the
00:59obvious fact that we are the fastest growing large economy in the world, and we will probably
01:06be the fastest growing large economy in 2025-26 as well. That is beyond doubt. But the other
01:15question is, what is the rate of growth that India needs at this point? Where do we stand
01:21in the demographic transition? And what kind of growth rates are countries had at the same
01:27point in their demographic transition? China, for example, when it was going through a similar
01:33stage of its demographic transition, was growing at 11-12%. That is the growth that is possible
01:40because there are new entrants to the workforce, the workforce is expanding, there is need
01:45for creating employment. The economy has to grow a lot faster during those periods when
01:51the labor force is rapidly expanding. And then 7% is not enough. We need to grow more
01:58than 8%. So, that is one side of it. The other side is, what is the growth rate that the
02:04Indian economy is capable of? What are the barriers to that growth? And I think we have
02:11gone through a series of reforms in the last several years, the digitalization of the economy,
02:17the investment in public infrastructure, all of that steps up the potential growth rate of the
02:23economy. So, whether you look at it in terms of the growth rate that we need, or the growth rate
02:29that India is capable of, that would be a number in excess of 8%. And then you put 7% against that,
02:37what you'll come up with is that the fastest growth rate in the world is still not good
02:42enough. And one of the things that is probably holding back growth is excessively restrictive
02:49monetary policy. And we need to be on the guard against that and avoid excessive growth sacrifice
02:56at this point of time. The problem is that if an economy gets habituated to 7% growth,
03:04then everybody starts thinking that that is the growth that the economy is capable of.
03:09And then 7% becomes a ceiling, because everybody thinks we can't grow faster than 7%.
03:15It is necessary to break that perception, to bring in the confidence that we can grow at 8%
03:21and above. And therefore, I think the opportunity is there right in front of us in the next couple
03:27of years to step up our growth rate significantly. And we should not let monetary policy stand in the
03:33way. Right. And you know, the obvious sort of revert to that point regarding the growth sacrifice
03:42has been that at the current juncture, the food inflation continues to be persistent to the point
03:49that it may now be having spillover effects to headline inflation. And that's been the rationale
03:56that's been given for the RBI members, including the governor and the deputy governor, standing by
04:02their decision to hold a status quo on the benchmark lending rate. You've, of course,
04:06in your commentary also spoken about how inflation is on a downward trend. But how are you then
04:13looking at food inflation? Do you think that it is not endemic? We had Ashima Goyal right before
04:19you and she does believe that it is indeed transient. So what's your stance on all of that?
04:25You see, what we know about food inflation is that it is very volatile.
04:30And transient is another way of describing the same thing. It goes up and down quite a lot from
04:37quarter to quarter. So when you look at projections, you see the headline inflation jumping up and down
04:43and it jumps up and down to a great extent because food inflation is jumping up and down.
04:47What we have seen in the last year or more is that with restrictive monetary policy,
04:55food inflation has not spilled over into gold. This is the very clear empirical evidence of
05:02the last year or so. Even when we had very high food inflation, that did not, that did not spill
05:09over into headline. And I think it will not spill over to headline in the coming year as well.
05:15For multiple reasons. One is that we have an inflation targeting regime and there is credibility
05:22of that regime. And people will realize that yes, if inflation goes up, restrictive monetary policy
05:28will bring it down. So we will never get into that vicious cycle of food inflation producing
05:35high core and then high core producing more inflation. That's why we will be, you know,
05:40an inflation targeting regime breaks that spiral. We saw that effective last year, which will be
05:46effective in the coming years as well. And a lot of food inflation is transient. A lot of it is
05:54happening in vegetables where the harvest cycle is very short. You can get a bad tomato crop today
06:04and in two months' time, or three months' time, you would have a new crop coming in which and you get
06:09a supply response, right? That if tomato prices are high, then more people are going to sow tomatoes
06:15and you will get more supply in the next harvest, three months down the line. So all of these
06:21structural reasons make one believe that food inflation will be transient. It is not that there
06:29is something inherent about food inflation that makes it transient. It is that with a proper
06:35macroeconomic environment, it will be transient because of the supply response and because
06:43restrictive monetary policy prevents it from spilling over into core. That is really the logic.
06:51All right. Okay. So, you know, this was your lecture.
06:56All right. Okay. So, you know, this was your last monetary policy meeting as an external member.
07:03I do want to understand, you know, what your thoughts are more broadly
07:08regarding the recent debate that actually we have every now and then regarding whether
07:13we should target more, target core more specifically rather than headline or maybe
07:19take that into account more than we currently do. So I do want to understand your stance on
07:26that as well. And also, you know, given that this was your last meeting that you attended
07:33as an external member, would you have preferred a rate cut this time around at least? That's
07:38something you've been batting for for a while now. No, I think it's important to recognize that
07:48these are collective decisions that we are taking as a committee we decide. And the important thing
07:55is what is right for the economy at a particular point in time. And we should not let personal
08:02preferences, you know, that in the last meeting, I must have my way or something. That is completely
08:08the wrong way of looking at it. At every meeting, first, last or in the middle, the task that we
08:14have is to do what is right, in our best judgment and our best ability, what is the best thing for
08:21the economy. That is the way that I look at this. What I also think is that, you know, as an MPC,
08:32we have been given a statutory mandate to keep headline inflation within the band of four plus
08:40minus two. Now, as a statutory body entrusted with this mandate, I think it would be completely
08:49inappropriate on our part to go around talking about what the target should be. We are given
08:57a target, our job is to implement the target, right? If you are the head constable of a police
09:03station, your job is not to talk about what the Indian Penal Code ought to be. Your job is to
09:09implement the Penal Code as it stands. So that is the way the MPC should look at it. We are given
09:14a statutory target, we have to adhere to that. We can't go about complaining that this is not
09:20the right target. We knew that the headline inflation was our target when we took over as
09:25the MPC. If we didn't like it, we would have said we are not joining you. The moment we joined,
09:30we accepted this mandate, we accepted this as the target and our job is to just go and
09:36try to implement this target. That's the way I look at it.
09:41Absolutely. All right. Thank you so much, Mr. Verma for taking time out for us. We do
09:45hope to continue to speak to you going forward post this as well. Thank you once again.