A dove of Indian monetary policy signals. It is time to abandon the aggressive pace of increases in borrowing costs. It says the inflation-adjusted real interest rate is approaching neutral ground. As a result, it will reach a level where it can help control inflation without stifling economic growth.
Sticking to larger increases instead carries the risk. Risk of reducing already weakened the demand without softening inflation. Ashima Goyal, one of the six members of the Monetary Policy Committee, warned in an email interview. She added that he is not speaking on behalf of the full MPC.
“Indian real interest rates are not far from neutral,” he said. The Benchmark rate has risen to 4.9%, amid inflation that fell to 7% in May from 7.8% in the previous month.
The Reserve Bank of India’s rate panel increased its key rate by 90 basis points in two moves since May. It is among 60 others that have raised borrowing costs by half a percentage point or more in a single session to control inflation.
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Goyal knows for her reluctance to make loans more expensive. As actions to cool demand can lead to a rise in the unemployment rate in an economy still struggling to recover. There is no general agreement on what the neutral rate should be for a particular country. A recent paper from the Reserve Bank of India suggested that it may have fallen after the pandemic.
Economists see the central bank raising rates at least twice. It is more before weighing a pause. The consumer price growth in India has remained above the RBI’s 6% upper tolerance limit since earlier this year.
Goyal is a professor at the Indira Gandhi Development Institute. Goyal says rates will rise. The pace will depend on inflation and growth outcomes and their impact on inflation forecasts.
Continued aggressive hikes happen when the economy is recovering from a pandemic shock. It will “impose a large production sacrifice with little effect on inflation,” he said. He also adds that “swift and decisive action to keep real rates close to neutrality is adequate to anchor inflation expectations.”
Also, government measures to address supply-side inflation continue, he said. His colleague on the panel is Jayanth Rama Varma. He advocated adopting rate guidance from the Federal Reserve’s dot plot, along with the inflation forecast.
MPC minutes released last week showed members decided on a 50-basis point rate increase. But the rate differed on how inflation will evolve. Lt. Gov. Michael Patra said last week that MPC will likely lose its inflation mandate.
Here are a few more excerpts from the interview with Goyal:
“Losing the goal of the MPC is not important and is understandable given the circumstances. The important thing is to confirm the commitment to flexible inflation. Flexible inflation targets and reduce inflation with the least sacrifice of output.”
“My future votes will depend on the results, not on a preconceived ideological position.”
On inflation, “we may be pleasantly surprised. Crude oil and palm oil are softening, as are other commodities. The uncertainties are still big, so we look forward to the data.”
The chances of stagflation in India are “zero”. “Growth remains large and positive despite repeated shocks. A slight slowdown in growth is not stagflation. The economy has demonstrated intrinsic resilience, supported by its growing diversity.”
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