Prof. Jayanth R Varma, the only monetary policy member (MPC) to vote against the Reserve Bank of India maintaining its accommodative stance, is of the view that easy money today could lead to high interest rate tomorrow.

Varma, in the meeting held between 4-6 August, said there is a need to begin raising the reverse repo rate from 3.35% in order to keep the repo rate at 4%.

According to Varma, the reverse repo rate of 3.35% was no longer appropriate. “By creating the erroneous perception that the MPC is no longer concerned about inflation and is focused exclusively on growth, the MPC may be inadvertently aggravating the risk that inflationary expectations will be disanchored," he said.

If the MPC demonstrated its commitment to the inflation target with tangible action, it would be able to anchor expectations and sustain lower interest rates for longer.

" Persistent high inflation means that the monetary accommodation has to be somewhat restrained, and, therefore, I argued above for raising money market rates towards the repo rate of 4%," Varma said.

Suggesting that the current repo rate of 4% corresponds to a negative real rate in the range of 1-1.5% based on forward-looking inflation forecasts, he stated: “In my view, this level of rates is currently appropriate for reviving economic growth without excessive risk of an inflationary spiral.”

The MPC left the repo rate unchanged at 4% while continuing with the accommodative stance to revive and sustain growth on a durable basis.