Monetary policy needs to mutate: Jayanth Varma

The monetary policy stance of the central bank aimed at containing the fallout of the pandemic—when it began in 2020—is no longer relevant now, tells Jayanth Varma, professor of finance at IIM-Ahmedabad and a member of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), in an exclusive interview with Fortune India.

“The second wave was a far bigger human tragedy. But if you look at it as an economic event, then it is actually the reverse. The first wave was an economic disaster, but the second wave's economic effect has been far milder. Hence, the kind of things we did in the first wave may not be appropriate for the second wave,” says Varma.

Varma was the only member to suggest a rethink of the accommodative stance during the meeting of the panel in the first week of August. In a five-to-one vote, the MPC—for the seventh time in succession—decided to continue with the accommodative stance as long as necessary and kept the policy rate, the repo rate, unchanged at 4%.

Varma believes that, unlike the first wave, which was widespread, the second wave—which began in mid-March this year and peaked by May—has not been as severe. “The first wave hit everybody indiscriminately…the entire economy, the entire financial sector, everything was suffering massively. But the second wave besides being milder was also concentrated in narrow segments,” he adds.

At the MPC meeting, Varma had articulated that the ill-effects of the pandemic was concentrated in narrow pockets of the economy, where contact intensive services had suffered heavily, while other industries were operating above pre-Covid levels.

Against such a backdrop, he believes monetary policy cannot make any significant impact. “Monetary policy is a uniform thing…It can’t be focused. It's just like you are flooding the economy with money, it will go everywhere. Unlike fiscal policy which can do a direct benefit transfer only to half a million people who are suffering, monetary policy can’t reduce interest rates only for hotels or airlines,” says Varma. “If you reduce the interest rate, you are reducing it for everybody, including for those industries which are not suffering at all and, in fact, are doing well. So, the monetary policy appropriate for the first wave may not be appropriate for the second wave.”

Varma believes the virus is unlikely to go away anytime soon and that the monetary policy committee needs to be cognisant about it. “In the first wave, the belief was that if we take the bitter medicine, the problem will go away. The second wave showed us that you can keep taking the bitter medicine but the virus has no intention of going away. We will learn to just live with it, the way we have learnt to live with many other diseases,” says Varma.

That has been the case, given that the Delta variant has reversed the transition towards normalcy. It first began in the U.K., subsequently in the U.S. and now in Israel—the first country to have vaccinated its entire population. As a result, experts believe, for now, the Delta variant has effectively blocked the possibility of countries achieving herd immunity.

Given the evolving scenario, Varma feels it should be safe to assume that the pandemic is unlikely to go away till 2025. “People are now talking of a third wave, fourth wave, fifth wave, whatever, it will keep coming at us and who knows it may be there five years from now. We will learn to just live with it, the way we have learnt to live with many other diseases.”

Hence, Varma believes keeping the monetary policy accommodative for such a long period makes little sense. “It's very different from saying that (let's be accommodative) during the first wave. The world has changed and we must recognise the change that has happened in the economic environment and, therefore, the monetary policy needs to adapt to what has happened. It also needs to mutate.”