In a telephonic interview with PTI, the MPC member said, the monetary policy takes, you know, five to six quarters to have its impact and cool prices. He added, "We started only in April. We will start seeing the effect of that tightening later in the year."
He explained that the monetary policy committee is prioritising inflation right now, and trying to bring inflation under control and then move from that.
In September, India's inflation rose to a five-month high of 7.41% due to higher food prices. Inflation is already at a multi-year high in the country. The latest inflation print has stubbornly stayed above RBI's tolerance limit for nine consecutive months.
RBI's monetary policy decisions are with the objective to achieve the medium-term target for consumer price index (CPI) inflation of 4% with a band of +/- 2% while supporting growth.
Inflationary pressure this year globally has pushed major central banks including RBI to take an aggressive approach to raise interest rates.
RBI has hiked the repo rate by 1.9% since May 2022. Currently, the key rate is at 5.90% which has led to a hike in lending and deposit rates as well.
For the entire fiscal FY23, RBI expects inflation at 6.7% which is above its upper tolerance limit. For Q2, the central bank predicts inflation at 7.1%, while the figure is expected to slowdown from Q3 at 6.5% and further to 5.8% in Q4. For the first quarter of FY24, RBI predicts inflation at 5%.
RBI factors India's economic growth at 7% for FY23. For Q1 of FY24, GDP is projected at 7.2%.
There is a dual challenge currently. According to Varma, economic growth is below what the central bank would like, and inflation is higher than what they would like, and that poses a difficult challenge for the monetary policy.
On the Indian rupee which has touched historic lows against the US dollar, Varma said in the interview that the danger is much higher when the rupee is weak than when the dollar is strong.
Giving his personal view on whether RBI should defend the rupee, Varma stated that the approach in dealing is different when the dollar strengthens and different when the rupee weakens. He said that they are two very different phenomena that require different responses.
Currently, the rupee is near 82.35 against the dollar on Monday. The rupee is now inching closer to 83 levels against the greenback. So far this year, the rupee has slipped by about 8% against the dollar, while the American currency is at its highest level in more than two decades.
