RBI’s next policy decision is to be taken on 30 September.
Mumbai:
Monetary Policy Committee (MPC) member JR Verma on Friday said the success of the Reserve Bank of India’s interest rate hike in controlling inflation is still unclear and the pace of rate adjustment will depend on the state of the economy.
“If there is strong economic growth, we would like to accelerate the reduction in (inflation) to 4%. But if the economy is struggling, a slower pace of adjustment would be appropriate,” Verma told the Reuters Trading India Forum.
The central bank raised its key policy repo rate by 50 basis points (bps) to 5.40% in August, taking the overall hike to 140 bps from May. Its next policy decision is on September 30, which is expected to increase by less than 50 bps.
By tightening liquidity, the central bank also raises interbank interest rates within a band called the corridor, which is defined by the rates at which it borrows or lends from banks.
“The movement of market interest rates from the lower end of the corridor to the upper end of the corridor is itself a form of tightening, and so the actual rate hike is not 140 bps but perhaps 205 bps,” Mr. Verma said.
He also said there was no consensus on India’s neutral real rate, which the central bank defines as the real (inflation-adjusted) interest rate at which economic growth is close to potential and inflation is stable. But he pointed to estimates between 0.5% and 1.5%.
“We are now in a state of high inflation and a weak economy. So the real rate may have to be only slightly above the neutral rate,” he said, adding that the real rate was calculated using the estimated inflation of three to four quarters. Should be known Not based on forward and current inflation.
Based on that expectation, Mr. Verma sees more room for the Reserve Bank of India to raise interest rates. “But probably not much,” he said, “that the debate is really up for the next meeting.”
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