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The Reserve Bank of India’s (RBI’s) rate-setting panel at its latest meeting was divided over whether policymakers should surprise the market with a reversal in policy stance, the minutes of the meeting held on 6-8 October showed.

Monetary policy committee (MPC) member Jayant Varma, who in the last two policies had advocated for an increase in the reverse repo rate, said he believes that policymaking done in slow motion to avoid surprises is no longer appropriate.

“Both of these risks—one to inflation and the other to growth—are well beyond the control of the MPC, but they warrant a heightened degree of flexibility and agility. A pattern of policymaking in slow motion that is guided by an excessive desire to avoid surprises is no longer appropriate," Varma said.

While all six members of the MPC voted in favour of keeping the repo rate unchanged at 4%, Varma was the sole dissenter when it came to retaining the accommodative stance. His comments, along with those of other MPC members, were published by the RBI on Friday.

Varma argued that 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 a longer period, aiding the economic recovery.

Despite Varma’s dissent, the MPC decided to continue with the accommodative stance as long as necessary “to revive and sustain growth on a durable basis and continue to mitigate the impact of covid-19 on the economy, while ensuring that inflation remains within the target going forward".

Central bank governor Shaktikanta Das believes that rocking the boat when the economic recovery process is delicately poised may not be the best thing to do and that it requires a continued monetary support to ensure that growth takes firmer roots.

“Given an ever evolving and dynamic environment, with the outlook overcast by several uncertainties, including the fact that the pandemic is far from over, we need to ensure that the nascent revival of economic activity shows signs of durability and sustainability," Das said.

“At this critical juncture, our actions have to be gradual, calibrated, well-timed and well-telegraphed to avoid any undue surprises," he said.

“We are reaching the shore after sailing through a very turbulent journey, and we cannot afford to rock the boat at this crucial stage. We must ensure that we reach safely to begin the journey beyond the shore," the governor added.

Agreeing with Das, MPC member and RBI executive director Mridul Saggar said he believes that RBI should prepare the market by first adjusting liquidity levels.

“If at all some guidance is needed at this stage, it has to be a soft one; with RBI preparing markets that while policy stance is likely to remain accommodative till growth is revived on a durable basis, liquidity levels will be adjusted dynamically to appropriate lower levels that are still consistent with accommodative stance," he said.

“Second, we need to reinforce our commitment to the assigned inflation target guided by data inflows on growth, inflation and other parameters," Saggar added.

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