The Reserve Bank of India is not “behind the curve” in raising interest rates in the face of rising inflation, Monetary Policy Committee (MPC) member Ashima Goel said on Sunday, stressing that it is never wise to react to the shock when the economic recovery is shaky. Post coronavirus epidemic.
While acknowledging that India is “particularly weak” in combining food and crude oil prices due to the Russia-Ukraine war, Gayal, a leading economist, said the rate of growth should be coordinated with the economic recovery. His remarks came just days after the central bank’s rate-setting panel, the MPC, surprised the market with an increase of 40 basis points in the repo rate at an off-cycle policy meeting this month. This was the first rate increase since August 2018, in the spree of inflation.
“The RBI started balancing liquidity last year, when the US Federal Reserve has yet to start its balance sheet deal with inflation much higher than its target,” he told PTI in an interview. Noting that inflation has surpassed the RBI’s tolerance band due to the protracted Ukraine-Russia war, Goyal said Indian demand and wages were “soft”.
“In the United States, there was extra stimulus because of the large government spending. The labor market is tight. The Fed may be behind the curve, not the RBI. The pace of Indian inflation is different from that of the United States, “he said.
Gayal was answering the question as to why the RBI did not raise interest rates much earlier despite rising inflation and whether the central bank would lag behind the US Fed in this regard. Earlier this month, the US Fed raised the benchmark lending rate by 50 basis points.
On the domestic front, retail inflation reached an eight-year high of 7.79 percent in April this year and the RBI is likely to tighten monetary policy. Inflation rose for the seventh consecutive month in April. The RBI has been made mandatory by the government to keep inflation at 4 per cent with a margin of 2 per cent on both sides.
According to Gayal, ensuring that real interest rates do not move too far out of equilibrium levels and avoid unnecessary volatility in rates will help keep growth and inflation in balance. He further noted that after the global financial crisis, real interest rates were extremely negative which created additional heat and in the 2010s they slowed down and moved to large positive numbers.
“Rate growth should be linked to recovery. In this way, the sacrifice of growth needed to moderate inflation can be reduced by pushing for continued supply, ”he said.
The inflation forecast, to which the MPC responds, was within the tolerance band, Goyal said, adding that recovery from the epidemic has not been completed, and the threat of further surges if the MPC meets earlier is still strong. He was referring to meetings before the Off-Cycle One, held May 2-4.
“It is never wise to react excessively to a first-round push, even if it follows a series of previous shocks, especially when the country is in a shaky recovery from the epidemic,” he said. .
Noting that the markets have reacted to the threat and have already raised prices sharply, Goyal said, “The MPC move could lead to sharp rate hikes at that juncture and further volatility in the market.” India has “started a war that is particularly risky for a combination of food and crude oil inflation,” he noted.
Asked if the reduction in fuel taxes would reduce inflation, he said inflation was high due to multiple supply pressures following each other, although recovery was also hurting capacity in some sectors.
“Counter-cyclic fuel taxes could reduce output output needed to sustain inflation under supply-shock,” he said.
In anticipation of further fluctuations in the outflow of capital from countries like India due to anticipation of further Fed rate hikes, he said India’s careful process of ordering and restricting the inflow of foreign capital has ensured that such capital is not too much in the local market.
“We see that domestic and foreign investors are taking opposite positions in the stock market,” said Goyal, adding that diversification makes the market more stable.
The flow of most interest-sensitive loans is already gone, he said, noting that India has huge reserves to exploit short-term volatility and strong macroeconomic fundamentals. “Over time, foreign investors will not want to miss out on Indian growth prospects that will be better than most countries,” the prominent economist stressed.