Informist, Friday, Apr 21, 2023
By Shubham Rana
NEW DELHI - It was important to send a signal that the decision to keep the policy rate unchanged does not imply future rate hikes have been ruled out, Ashima Goyal, external member of the Reserve Bank of India's Monetary Policy Committee said today.
In order to send this strong signal, with persistent risks to inflation from the likely weak monsoon and crude oil prices, Goyal voted to retain the "withdrawal of accommodation" policy stance in April, a stance she was opposed to at the last policy review in February.
"While pausing it was important, because of weather and oil price-related uncertainties, to give a stronger signal that the pause did not rule out future rate hikes, if required," Goyal told Informist in an interview after the minutes of the April MPC meeting were released on Thursday.
The RBI's rate-setting panel had unanimously decided to keep the repo rate unchanged at 6.50% at its latest meeting that concluded on Apr 6.
Goyal said the policy rates have not been overshot and a real interest rate of near unity is enough to guide the headline inflation towards the target of 4%. "If expected real rates rise above what is required to reach our inflation target, a rate cut would be appropriate," said Goyal, a professor of economics in the Indira Gandhi Institute for Development Research.
Following are the edited excerpts from the interview:
Q. You voted to keep the stance as "withdrawal of accommodation" in April but had voted against this in February. What led you to change your view on the stance?
A. While pausing it was important, because of weather and oil price related uncertainties, to give a stronger signal that the pause did not rule out future rate hikes, if required.
Q. You have mentioned in the past that India’s inflation target may need to be reviewed because of high global inflation. In the current scenario, what do you think is a more realistic target?
A. Excess demand-driven high inflation in the advanced economies does not affect our inflation. It only reduces the need for nominal rupee depreciation. If commodity and food price inflation sustains higher, we may need a higher target. At present, 4% seems attainable.
Q. Some economists have said since the inflation target is 4%, the MPC should do more to bring it down to the target and not be comfortable with just keeping inflation below 6%. Is the assumption that the MPC is comfortable with just keeping inflation within the 2-4% target band correct?
A. Remember, we are coming out of a once-in-a-century pandemic and a war that raised food and oil prices, which impact our inflation. India has a flexible, not dogmatic, inflation targeting. That flexibility has to be used when required. Reducing growth steeply may not reduce inflation since supply constraints would worsen and there would be large foreign capital outflows. India is in a 'sweet spot' globally because of well-balanced policies. Now that growth has shown resilience, the MPC can focus more on the target.
Q. The RBI's projections on growth and inflation assume India's crude oil basket at $85 per barrel. The basket has been above $85 since the policy review. Does that not pose upside risks to inflation and downside risks to growth?
A. Brent crude today is below $85. And the Indian crude basket is now below the Brent price. And crude oil futures are substantially below $85.
Q. What are the potential circumstances that may force the MPC to hike the repo rate in the next few policies?
A. If expected inflation rises above the tolerance band, it may be necessary to further raise the repo rate.
Q. You have flagged risks to growth in the MPC minutes. In your view, how realistic are the RBI's and the Economic Survey's growth forecasts for 2023-24?
A. The risks to growth have lowered the growth forecast to 6.5% below last year's growth estimate of 7%. But the real rate has not been raised high enough as yet to impose a large growth sacrifice. The economy has shown rising diversity and resilience to external shocks and the global growth slowdown is also less severe than expected. The growth forecasts are, therefore, feasible.
Q. In the MPC minutes, you said tightening by global central banks is enough but the US Federal Reserve is expected to go for one more rate hike. If the Fed does another rate hike, will that put pressure on the MPC to hike the repo rate more?
A. We have been communicating consistently that our inflation is different from that in major advanced economies. We do not have fiscally-induced excess demand and a tight labour market. And we have the space to suit our rate hikes to domestic needs. We do not have to follow the Fed.
Q. The expectations of El Nino conditions developing has put focus on the food inflation trajectory. Do you see food inflation spiking, thereby leading to a higher headline CPI print?
A. The forecasts are mixed at present. Indian climatic zones are diversified and the share of cereals in Indian agriculture has also fallen, making it less vulnerable to monsoon shortfalls.
Q. Your fellow MPC member Jayanth Varma has suggested that instead of the policy stance, the committee should move towards a dot plot like in the US. Do you share this view?
A. Under current global uncertainties and large repo steps taken, forward guidance is less useful. Those dot plots keep changing and have a poor record in prediction.
Q. You have said that core inflation may soften over the year. What is the extent of the moderation you see in core inflation in 2023-24?
A. I do not believe core inflation is 'sticky'. Persistence came from multiple supply shocks working through the system. There are no second-round effects due to excess demand or tight labour markets. Firms were not able to fully pass on higher input costs due to low demand and these cost pressures have also eased. Core inflation is falling towards 5% and may go below. WPI inflation, which has a larger share of producer prices, is very low.
Q. You said "there is no logic for overshooting policy rates and then cutting". At 6.50% repo rate, what are the chances of rate cuts in India in financial year 2023-24?
A. Policy rates have not yet overshot. Expected real rates of around unity are appropriate to guide inflation towards the target.
Q. What are the circumstances that may force you to think about rate cuts in this financial year? If the Federal Reserve starts cutting interest rates this year, will that give room to the MPC to follow suit?
A. Our rate decisions are based on domestic needs, not on the US macroeconomy. If expected real rates rise above what is required to reach our inflation target, a rate cut would be appropriate. End
Edited by Ranjana Chauhan
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