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Informist, Friday, Jul. 11, 2025
--Ashima Goyal: Room for more rate cuts if inflation stays below forecast
--Ashima Goyal:Signs of growth picking up suggest current real rate adequate
--Ashima Goyal: Expected real rate near 1%, "which is acceptable"
--CONTEXT: Former external MPC member Ashima Goyal's comments in interview
--Ashima Goyal: Important MPC doesn't over-react; can lead to overheating
--Ashima Goyal: RBI's VRRRs help banks as rates better than SDF
--Ashima Goyal: Current excess liquidity of over INR 4 tln too large
--Ashima Goyal: Excess durable liquidity of INR 1 tln reasonable
By Shubham Rana
NEW DELHI - The Reserve Bank of India's Monetary Policy Committee could see space opening up for more interest rate cuts going ahead if CPI inflation stays below the central bank's forecasts, according to Ashima Goyal, former member of the rate-setting panel. "If inflation persists below forecasts then there will be room for more cuts," Goyal said in an email interview to Informist.
"Inflation is likely to come in below the RBI forecast of 2.9% in Q1 (Apr-Jun)," Goyal said. "However, it is better to look through transient inflation rise as well as fall." According to an Informist poll, CPI inflation in June is likely to fall to an over six-year low of 2.3%. At 2.3%, inflation will average 2.7-2.8% in Apr-Jun, 10-20 basis points lower than the RBI's forecast for the quarter. The government will release June CPI data on Monday.
CPI inflation has stayed below the RBI's medium-term target of 4.0% since February. The fall in inflation over the past few months and a slowdown in economic activity has allowed the MPC to lower interest rates by a total of 100 basis points in 2025 so far, including a larger-than-expected 50 bps on Jun. 6.
The MPC also unexpectedly changed the policy stance to neutral in June, having adopted the accommodative stance only in April. "They are signalling front loading of policy with the latest change in stance--that they have used all the space immediately available for cutting," Goyal said. "The stance gives them the freedom to move in any required direction with the data and so is appropriate."
GROWTH AND TRANSMISSION
Goyal said the monetary policy easing so far and the inflation forecast of 4.4% for Jan-Mar means the expected real interest rate--nominal interest rate adjusted for inflation--is near 1%, "which is acceptable". "Indications that growth and private investment is picking up also suggest current real interest rates are at adequate levels," Goyal, emeritus professor at Indira Gandhi Institute of Development Research, said.
Goyal said since monetary policy acts with lags, action should be fast. However, she added, it is also necessary not to over-react, which can lead to overheating of the economy. "Therefore, future rate cuts, if any, will depend on how the data evolves. We need to wait to see the effect of the present cuts," said Goyal, whose four-year term in the MPC ended in August, said.
Asked if India can achieve 8% growth, Goyal said the revival of public investment, tax cuts by the government, and liquidity infusion by the RBI are already showing results. India's GDP grew 7.4% in Jan-Mar, and moving to 8% growth is not a big step from there, she said. "Domestic stimulus must stay in place to counter global fragilities. Then corporate confidence will stay robust."
The central bank has infused durable liquidity worth around INR 9 trillion into the banking system since January in a bid to quicken the transmission of lower interest rates. Goyal said excess liquidity will lead to quicker transmission to the real economy but it will not be instant. "These steps help, but full transmission takes time. We are already seeing a turnaround," she said.
Goyal said the current excess liquidity of over INR 4 trillion is too large. "Since there are large exogenous liquidity shocks in the Indian system it is good to always maintain durable liquidity in surplus, and especially so during a rate-cutting cycle," Goyal said. "But extreme infusions should be avoided," she said, adding that INR 1 trillion should be a reasonable amount of excess durable liquidity in the system.
The former MPC member said the RBI's decision to hold variable rate reverse repo auctions helps banks, who were parking excess funds through the standing deposit facility, which gives lower rate of return than reverse repo. End
Edited by Vandana Hingorani
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