Ashima Goel, a member of the Monetary Policy Committee (MPC), said on Sunday that the RBI was not “behind the curve” in raising interest rates in the face of rising inflation. Post coronavirus epidemic.
While acknowledging that India was “particularly vulnerable” to a combination of food and crude oil inflation as a result of the Russia-Ukraine war, Gayal, a leading economist, said the rate of growth should be coordinated with 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 began balancing liquidity last year, when the US Federal Reserve has not yet begun negotiating its balance sheet 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 has been additional stimulus due to large government spending. Labor markets are tight. The Fed may be behind the curve, not the RBI. The direction of Indian inflation is different from that of the United States,” he stressed.
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.
“The rate hike should be commensurate with the recovery. In this way, the sacrifice of growth needed to moderate inflation in the face of continued supply pressures can be reduced,” 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 an epidemic,” he said, adding that long-term price pressures have been implemented. In India, just after the start of the Ukraine war on 24 February.
Noting that markets are responding to fears and have already set the price for large-scale growth, Goyal said, “The MPC move could lead to sharp rate increases at that juncture and further volatility in the market.”
India is “particularly at risk from the combination of food and crude oil inflation, which has started the war,” 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 tax output can reduce remission 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.