Informist, Monday, Dec 25, 2023

--MPC Goyal:Real rate may not be too high if inflation view uncertain

--MPC Goyal: Need to watch effect of supply shocks on path to 4% CPI

--CONTEXT:MPC Member Ashima Goyal's remarks in interview to Informist

--MPC Goyal: Hard to give forward guidance in current uncertain times

--MPC Goyal:Can change stance, cut repo rate simultaneously if needed

--MPC Goyal:Real rate to be too high if CPI estimate below 5% sustained

--MPC Goyal: Don't need real rate above 1% if core inflation easing

--MPC Goyal:Real rate will rise without rate cuts as inflation easing

--MPC Goyal: Policy can be restrictive even with rate cut projections

--MPC Goyal: Better to have surplus in durable liquidity in India

--MPC Goyal:Money mkts must improve to stop big bks hoarding liquidity

--MPC Goyal: Need to see if inflation forecasts remain stable

--MPC Goyal:Need to see if CPI forecast not reversed by supply shocks

--MPC Goyal: Need to see if CPI view not reversed by overheating econ

--MPC Goyal: Reaching 4.5% inflation not enough, should stay there

--MPC Goyal: Rate decisions depend on how new data changes forecasts

By Shubham Rana

NEW DELHI – The Reserve Bank of India's Monetary Policy Committee can change its 'withdrawal of accommodation' stance and lower the repo rate simultaneously, if the conditions so require, says Ashima Goyal, external member of the central bank's rate setting panel.

"A policy stance is meant to give forward guidance, which is difficult in these uncertain times. Most central banks now state that decisions are dependent on data coming in," Goyal tells Informist in an email interview after the RBI released the minutes of the Dec 6-8 meeting on Friday. "Therefore, if the conditions require it, both decisions can be made simultaneously."

On Dec 8, the six-member rate setting panel unanimously decided to keep the repo rate unchanged at 6.50%, and voted with a majority of 5-1 to maintain the 'withdrawal of accommodation' policy stance. The MPC has kept the repo rate unchanged at 6.50% since February, and the stance as 'withdrawal of accomodation' since 2022.

Goyal's statement comes at a time when markets expect the rate setting panel to begin easing its restrictive policy with a change in stance first, followed by a repo rate cut. The current 'withdrawal of accomodation' stance is restrictive in nature, and limits the MPC's options to loosen monetary policy.

RBI Governor Shaktikanta Das had said in October that inflation needs to be near the central bank's target of 4% on a durable basis before the "withdrawal of accommodation" stance can be changed.
The external MPC member also believes that real rate is at risk of rising too high as inflation continues to fall. Real rate, or the repo rate adjusted for inflation, is currently closer to 2%, with CPI inflation expected to average 4.5% in 2024-25 (Apr-Mar), as per the RBI's Monetary Policy Report released in October. Goyal, along with other MPC members have said that a real rate of around 1% is the optimal rate to bring inflation to the 4% target without hurting growth.

"In my view, if core inflation is coming down in India with real rates about 1%, real rates do not need to rise more to bring inflation down further," says Goyal, who is also a professor at Indira Gandhi Institute of Development Research. 

"And they will rise without nominal rate cuts as inflation continues to fall," she says.

On a question on the quantum of cumulative rate cuts Goyal sees, she said that decisions would depend on how forecasts change as new data comes. It needs to be seen for some time if the forecasts remain stable and are not affected by the recurring supply shocks or by overheating in the economy, she says.

Following are edited excerpts from the interview:

Q. Food price shocks are the only major inflation concern right now. You have also flagged the risk of real rate being too high by mid-2024. If food prices ease from January onwards, as is expected, is there any possibility that you will vote for a change in the policy stance as early as February or even a repo rate cut?

A. Since monetary policy acts with a lag, we look at what the real repo rate is today after subtracting expected inflation from the current repo rate. But if inflation forecasts do not show a sustained fall, or are subject to large uncertainty, the real repo may not remain too high. Quite a few past forecasts of inflation approaching 4% have been interrupted by supply shocks. But in a mature inflation targeting regime, shocks are transient and have little effect on underlying inflation. There are signs of this happening, but we need to watch for some time until we are confident that even if shocks occur they will not interrupt progress to the 4% target.

Q. RBI Governor Shaktikanta Das has hinted policy stance will remain 'withdrawal of accommodation' till 4% inflation is achieved sustainably, and a repo rate cut is unlikely before the stance is changed. Are you of the view that the change in stance must precede the rate cut, or both decisions can be taken simultaneously?

A. A policy stance is meant to give forward guidance, which is difficult in these uncertain times. Most central banks now state that decisions are dependent on data coming in. Therefore, if the conditions require it, both decisions can be made simultaneously.

Q. You and your fellow external MPC member Jayanth Varma have talked about the possibility of real rate running too high in 2024. On other hand, the RBI has hinted that achieving 4% inflation on a durable basis is a must before rates can be lowered. Is there a fundamental difference in how external members and RBI officials view the path to bring inflation down to 4%, and on interest rate cuts?

A. Real rate will be too high if inflation forecasts below 5% are sustained. I do not think the RBI has said that 4% inflation must be achieved on a durable basis before rates can be cut. I think they have said inflation must be sustainably approaching 4%. In my view, if core inflation is coming down in India with real rates about 1%, real rates do not need to rise more to bring inflation down further. And they will rise without nominal rate cuts as inflation continues to fall.

The US Federal Reserve's recent decision shows that policy can remain restrictive and focused on achieving its inflation target even with projections of rate cuts. These projections were made as inflation and expected inflation fell, although inflation remains above their target. Policy is disinflationary if real rates are positive and above neutral.

Q. You said that Weighted Average Call Rate cannot persistently exceed the upper half of the Liquidity Adjustment Facility corridor. In your opinion, has the RBI done enough to keep the Weighted Average Call Rate below the Marginal Standing Facility rate for the last months till the recent announcement of Variable Rate Repo?

A. They were surprised by an unexpected build-up of government cash balances. But that is why I say that in a country like India subject to large exogenous liquidity shocks, it is better to maintain an adequate surplus in durable liquidity. Or else liquidity forecasting and microstructure of money markets must improve to enable surplus banks to lend to deficit ones and stop hoarding liquidity.

Q. You have said in the past that your ideal real rate is around 1%. The monetary policy report projects 2024-25 inflation at 4.5%. Does this mean that you will bat for a cumulative 100 basis points of rate cuts?

A. We need to see for some time if the forecast remains stable and is not reversed by supply shocks or by overheating in the economy. Reaching 4.5% is not enough, it should stay there. In uncertain times it is difficult to give forward guidance. Decisions depend on how forecasts change as new data comes in. 

End

Edited by Akul Nishant Akhoury

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2023. All rights reserved.

Informist, Monday, Dec 25, 2023

--MPC Goyal:Real rate may not be too high if inflation view uncertain

--MPC Goyal: Need to watch effect of supply shocks on path to 4% CPI

--CONTEXT:MPC Member Ashima Goyal's remarks in interview to Informist

--MPC Goyal: Hard to give forward guidance in current uncertain times

--MPC Goyal:Can change stance, cut repo rate simultaneously if needed

--MPC Goyal:Real rate to be too high if CPI estimate below 5% sustained

--MPC Goyal: Don't need real rate above 1% if core inflation easing

--MPC Goyal:Real rate will rise without rate cuts as inflation easing

--MPC Goyal: Policy can be restrictive even with rate cut projections

--MPC Goyal: Better to have surplus in durable liquidity in India

--MPC Goyal:Money mkts must improve to stop big bks hoarding liquidity

--MPC Goyal: Need to see if inflation forecasts remain stable

--MPC Goyal:Need to see if CPI forecast not reversed by supply shocks

--MPC Goyal: Need to see if CPI view not reversed by overheating econ

--MPC Goyal: Reaching 4.5% inflation not enough, should stay there

--MPC Goyal: Rate decisions depend on how new data changes forecasts

By Shubham Rana

NEW DELHI – The Reserve Bank of India's Monetary Policy Committee can change its 'withdrawal of accomodation' stance and lower the repo rate simultaneously, if the conditions so require, says Ashima Goyal, external member of the central bank's rate setting panel.

"A policy stance is meant to give forward guidance, which is difficult in these uncertain times. Most central banks now state that decisions are dependent on data coming in," Goyal tells Informist in an email interview after the RBI released the minutes of the Dec 6-8 meeting on Friday. "Therefore, if the conditions require it, both decisions can be made simultaneously."

On Dec 8, the six-member rate setting panel unanimously decided to keep the repo rate unchanged at 6.50%, and voted with a majority of 5-1 to maintain the 'withdrawal of accommodation' policy stance. The MPC has kept the repo rate unchanged at 6.50% since February, and the stance as 'withdrawal of accomodation' since 2022.

Goyal's statement comes at a time when markets expect the rate setting panel to begin easing its restrictive policy with a change in stance first, followed by a repo rate cut. The current 'withdrawal of accomodation' stance is restrictive in nature, and limits the MPC's options to loosen monetary policy.

RBI Governor Shaktikanta Das had said in October that inflation needs to be near the central bank's target of 4% on a durable basis before the "withdrawal of accommodation" stance can be changed.
The external MPC member also believes that real rate is at risk of rising too high as inflation continues to fall. Real rate, or the repo rate adjusted for inflation, is currently closer to 2%, with CPI inflation expected to average 4.5% in 2024-25 (Apr-Mar), as per the RBI's Monetary Policy Report released in October. Goyal, along with other MPC members have said that a real rate of around 1% is the optimal rate to bring inflation to the 4% target without hurting growth.

"In my view, if core inflation is coming down in India with real rates about 1%, real rates do not need to rise more to bring inflation down further," says Goyal, who is also a professor at Indira Gandhi Institute of Development Research. 

"And they will rise without nominal rate cuts as inflation continues to fall," she says.

On a question on the quantum of cumulative rate cuts Goyal sees, she said that decisions would depend on how forecasts change as new data comes. It needs to be seen for some time if the forecasts remain stable and are not affected by the recurring supply shocks or by overheating in the economy, she says.

Following are edited excerpts from the interview:

Q. Food price shocks are the only major inflation concern right now. You have also flagged the risk of real rate being too high by mid-2024. If food prices ease from January onwards, as is expected, is there any possibility that you will vote for a change in the policy stance as early as February or even a repo rate cut?

A. Since monetary policy acts with a lag, we look at what the real repo rate is today after subtracting expected inflation from the current repo rate. But if inflation forecasts do not show a sustained fall, or are subject to large uncertainty, the real repo may not remain too high. Quite a few past forecasts of inflation approaching 4% have been interrupted by supply shocks. But in a mature inflation targeting regime, shocks are transient and have little effect on underlying inflation. There are signs of this happening, but we need to watch for some time until we are confident that even if shocks occur they will not interrupt progress to the 4% target.

Q. RBI Governor Shaktikanta Das has hinted policy stance will remain 'withdrawal of accommodation' till 4% inflation is achieved sustainably, and a repo rate cut is unlikely before the stance is changed. Are you of the view that the change in stance must precede the rate cut, or both decisions can be taken simultaneously?

A. A policy stance is meant to give forward guidance, which is difficult in these uncertain times. Most central banks now state that decisions are dependent on data coming in. Therefore, if the conditions require it, both decisions can be made simultaneously.

Q. You and your fellow external MPC member Jayanth Varma have talked about the possibility of real rate running too high in 2024. On other hand, the RBI has hinted that achieving 4% inflation on a durable basis is a must before rates can be lowered. Is there a fundamental difference in how external members and RBI officials view the path to bring inflation down to 4%, and on interest rate cuts?

A. Real rate will be too high if inflation forecasts below 5% are sustained. I do not think the RBI has said that 4% inflation must be achieved on a durable basis before rates can be cut. I think they have said inflation must be sustainably approaching 4%. In my view, if core inflation is coming down in India with real rates about 1%, real rates do not need to rise more to bring inflation down further. And they will rise without nominal rate cuts as inflation continues to fall.

The US Federal Reserve's recent decision shows that policy can remain restrictive and focused on achieving its inflation target even with projections of rate cuts. These projections were made as inflation and expected inflation fell, although inflation remains above their target. Policy is disinflationary if real rates are positive and above neutral.

Q. You said that Weighted Average Call Rate cannot persistently exceed the upper half of the Liquidity Adjustment Facility corridor. In your opinion, has the RBI done enough to keep the Weighted Average Call Rate below the Marginal Standing Facility rate for the last months till the recent announcement of Variable Rate Repo?

A. They were surprised by an unexpected build-up of government cash balances. But that is why I say that in a country like India subject to large exogenous liquidity shocks, it is better to maintain an adequate surplus in durable liquidity. Or else liquidity forecasting and microstructure of money markets must improve to enable surplus banks to lend to deficit ones and stop hoarding liquidity.

Q. You have said in the past that your ideal real rate is around 1%. The monetary policy report projects 2024-25 inflation at 4.5%. Does this mean that you will bat for a cumulative 100 basis points of rate cuts?

A. We need to see for some time if the forecast remains stable and is not reversed by supply shocks or by overheating in the economy. Reaching 4.5% is not enough, it should stay there. In uncertain times it is difficult to give forward guidance. Decisions depend on how forecasts change as new data comes in. 

End

Edited by Akul Nishant Akhoury

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2023. All rights reserved.