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MUMBAI : The lone dissenter at the monetary policy committee said the Reserve Bank of India’s credibility will be restored only when the inflation rate is down to 5%. In an exclusive interview with Mint, Jayanth Varma said the MPC will be judged by the outcomes and not the promises it makes; hence, there is a need to bring down inflation quickly to below 5%. Edited excerpts:

With this off-cycle rate hike in May, has RBI regained its inflation targeting credibility?

The boost to credibility would come when the inflation rate comes down below, say, 5%. That’s when we can say we did our job. That’s when the markets and the public will also trust the MPC to manage inflation. Until then, we are only making promises. I think we will be judged not by the promises we make but by the outcomes we deliver. We have begun to do what is needed. I approach the responsibilities of an MPC member with a lot of humility. Nobody knows what will happen to inflation or growth. What we need is the humility to accept our mistakes and the willingness to correct the course if we go wrong.

What is the real interest rate you see in the medium term?

Nobody knows the precise value of the neutral real interest rate, but I think it is probably between 0.5% and 1.5%. Right now, the uncertainty on the neutral real rate is immaterial because we are very far from that. We are at -3%. There are two ways to get to a positive real interest rate. One is to keep pushing up the policy rate. If inflation is running at 8% and we raised the repo rate to 9%, we would get a +1% real interest rate. The second and preferred way of getting to positive real interest rate is to bring inflation down quickly, so that we need to raise the repo rate less. If we are able to bring inflation down to below 5%, we would be already close to a positive real interest, which is the argument for front-loading. Front-load the hikes, cool down inflation and move to a positive real interest rate not so much via hiking rates, but via reduction in inflation. It’s important to look at the policy rate from a perspective of a real interest rate rather than a nominal interest rate.

Should the next rate hike be of 60 basis points (bps) or 75 bps?

I said in my statement that we need more than 100 bps very soon. I haven’t mentioned the precise date or precise quantity and I do not wish to do so now. If we do more than 100 bps, we would get to repo rate above 5%. If we also bring inflation down to around 5% quickly, that would bring us within shouting distance of a positive real interest rate quickly. Once we get to a positive real policy rate, we can shift to a calibrated approach. If we front-load now, we might need only fine-tuning beyond that. (However), not all MPC members seem to believe in that approach. If there are six members of the MPC, there are six views. Even if all six agree on a certain decision, we may agree for six different reasons.

Did you look at a revised inflation forecast in May before you decided on a rate hike?

My April statement indicated that in the absence of the February guidance, we could have done a rate hike in April itself. What stayed our hands was that the February stance more or less precluded hiking rates. The whole market was expecting that we would remove the guidance in April and hike rates in June. But for this constraint, the data we had in the April meeting might have persuaded me to vote for a rate hike. Coming into the May meeting, I did not therefore need new data to vote for a hike. In any case, the May meeting happened too quickly to get too much new data. When we meet in June, we will have much more data from another round of surveys on inflation expectations and professional forecasts, and also more high-frequency indicators on gross domestic product and inflation.

When you met in April, you said there was a growth shock which could not be ignored. By May, you saw this shock easing. Did you find more confidence to hike in May?

Yes; I changed my assessment of the growth shock, but this reassessment would have impacted only the magnitude of the hike. In May, I wrote that we need more than 100 basis points very soon. In April, my assessment of this number might have been lower, perhaps 75 bps. However, the need for a hike would have been quite clear in April. My suggestion in May of more than 100 bps is coming from the assessment that the economy is holding up pretty well, but my vote for a hike does not depend on that.

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