The minutes of the August 8 Reserve Bank of India (RBI) monetary policy committee (MPC) meeting may be long remembered as the JR Varma minutes because not only did he dissent from voting for an accommodative stance, he has also asked for the reverse repo rate to be raised so that the difference between the repo and reverse repo's narrowed. He argued that extremely cheap money is doing little good and can do a lot of harm.

Share Market Live

NSE

In an interview with Latha Venkatesh, Shashanka Bhide, a member of RBI's MPC on August 24 said inflation has always been a concern, it was high even when the economy was not growing at its normal pace. It is high not because of higher aggregate demand but because of supply-side factors, he added.

"Inflation has always been a concern over the year. But at the same time, we have also been saying that economic recovery is important. What is also important is that the inflation rate has been high even when the economy was not at its full pace. So, there is this issue of what is constraining growth and inflation has been affected by what factors? It's not the aggregate demand, but it is the other factors that are influencing this inflation," Bhide explained.

Easy liquidity is something that is necessary at this point, he said, adding the reason why there is a high amount of liquidity or easy liquidity is also due to the fact that there have been other factors that have led to surplus liquidity, including capital flows.

“Therefore, I think normalisation in that context, certainly is something that would have to be done. I don't have a problem in saying that the easy liquidity, excess liquidity, is something that is necessary at this point," he said.

Also Read: RBI MPC Minutes: Not worried about transient surge in inflation above 6%, says Prof JR Varma

Bhide pointed out that high-frequency indicators suggest growth can be better. He said that as restrictions on movement and economic activity are relaxed, getting back to better performance is what is to be expected.

“Therefore the performance of some high-frequency indicators, even in June for example, were suggesting recovery is taking place, especially in the manufacturing sector. So, growth performance could be better. But the only point is that the experience elsewhere suggests that one has to be careful on how these things unfold," he said.

Also Read: RBI MPC Minutes: Re-enforcement of pro-growth could be marginally positive for market, says expert

Bhide said the performance of the agriculture sector has been expected to be good despite a few deficiencies in the rainfall during the monsoon period. Therefore, the expectations of growth better than 9.5 percent has been suggested by a number of forecasters as well, he said.

“So, growth is certainly expected to be better than what it was last year, but how much of that decline we will make up during this year is an important question," the RBI MPC member said.

Also Read: RBI policy: An adroit balancing act

Watch the video for more.

(Edited by : Kanishka Sarkar)