Reserve Bank’s Monetary Policy Committee member Jayanth Varma has said the monetary policy is not the right instrument to deal with the Covid-19 pandemic and it’s no longer appropriate to stick to the policy stance first adopted in May last year.
“I believe that monetary policy is no longer the right instrument to deal with the Covid-19 pandemic whose economic effects (as opposed to its health effects) have diminished greatly and become more concentrated in narrow pockets of the economy,” Varma said at the MPC meeting, according to minutes of the meet released by the RBI. There is no evidence so far to suggest that the Omicron variant of the Covid-19 virus would change the picture materially, Varma said.
The MPC had kept the Repo rate unchanged at 4 per cent and maintained the accommodative policy stance.Varma said economic activity appears to have surpassed its pre-pandemic level, continued recovery is likely during the rest of 2021-22, and the prognosis is for healthy growth in 2022-23 as well.
On the other hand, there is increasing evidence of inflation becoming persistent in the upper region of the tolerance band, though it is projected to remain within the band, he said.“In this environment, it is no longer appropriate to stick to the monetary policy stance first adopted in May 2020 when the adverse economic effects of the pandemic were at their peak.
I am therefore not in favour of the decision to keep the reverse repo rate at 3.35 per cent, and vote against the accommodative stance,” Varma said. Raising effective money market rates quickly towards 4% would demonstrate the MPC’s commitment to the inflation target, help anchor expectations, reduce risk premia, enhance macroeconomic stability, and allow lower long-term interest rates to be sustained for longer thereby aiding the economic recovery, he said.