Ms. Goyal was responding to a question, why didn’t the RBI raise interest rates long ago despite rising inflation?
Ms. Goyal was responding to a question, why didn’t the RBI raise interest rates long ago despite rising inflation?
Monetary Policy Committee (MPC) member Ashima Goyal on Sunday said the Reserve Bank of India is “not behind the curve” in raising interest rates to tackle rising inflation following the coronavirus pandemic.
Acknowledging that India is “particularly vulnerable” to the combination of food and crude oil inflation resulting from the Russo-Ukraine war, Ms. Goyal, who is also a noted economist, said the rate hike should be considered as a catalyst for economic recovery. should be combined with.
His remarks come days after the central bank’s rate-setting panel MPC surprised the markets with a 40 basis points hike in the repo rate at an off-cycle policy meeting this month. It was also the first rate hike since August 2018 amid rising inflation.
“The RBI began to rebalance liquidity last year, while the US Federal Reserve has yet to begin contracting its balance sheet, with inflation exceeding its target,” she said. PTI in an interview.
Noting that inflation has exceeded the RBI’s tolerance limits due to the Ukraine-Russia war, Ms Goyal said Indian demand and wages are ‘soft’.
“In the US, there was excessive stimulus because of the large government spending. Labor markets are tight. The Fed may be behind the curve, the RBI is not. The Indian inflation trajectory is different from that of the US,” she asserted.
Ms. Goyal was responding to questions on why the RBI did not raise interest rates long ago despite rising inflation and whether the central bank would be a little 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 hit an eight-year high of 7.79% in April this year and further tightening of monetary policy is likely by the RBI.
Inflation galloped for the seventh consecutive month in April. The RBI has been mandated by the government to ensure that inflation remains at 4% with a gap of 2% on either side.
According to Ms. Goyal, ensuring that real interest rates do not deviate too much from equilibrium levels and avoiding undue volatility in rates will help maintain a balance between growth and inflation.
He also pointed out that after the global financial crisis, real interest rates were extremely negative, causing overheating, and they turned positive in the 2010s, exacerbating the recession.
“The rate hike should be linked with recovery. This way the growth sacrifice required to contain inflation under persistent supply shocks can be minimized,” she said.
Inflation forecasts, to which the MPC reacts, were very much within the tolerance band, Ms. Goyal said, adding that the growth recovery from the pandemic was not complete, and the threat of further waves was still strong when the MPC first met. She was referring to the meetings before the off-cycle one held from May 2 to 4.
“It is never wise to go ahead with a first-round shock, even if it follows a series of earlier shocks, especially when the country is unable to recover from a pandemic,” she said, adding that the long-term value of The pressures have become physical. In India only after the start of Ukraine war on 24 February.
Noting that the markets have overcome the apprehensions and have already taken large rate hikes, Ms Goyal said, “At that point the MPC action could lead to a sharp rise in rates and additional volatility in the markets. ” India is “particularly vulnerable to the combination of food and crude oil inflation that the war has unleashed,” she said.
Asked whether the cut in fuel tax will bring down inflation, he said inflation is high due to multiple supply shocks one after the other, though recovery in some sectors is also impacting capacity.
“Counter-cyclical fuel taxes can reduce the production sacrifice required to control inflation persistently under supply-shocks,” she said.
On fears of huge volatility in capital outflows from countries like India due to expectations of more Fed rate hikes, he said, India’s careful process of indexing and limiting the entry of foreign capital has ensured that in respect of such capital Not very big. domestic market.
“We are seeing that domestic and foreign investors are taking opposite positions in the stock market,” said Ms. Goyal, adding that diversification makes the market more stable.
Most interest-sensitive credit flows have already left, he said, adding that India has large reserves to absorb short-term volatility and strong macroeconomic fundamentals.
“Over time, foreign investors will not want to miss out on Indian growth prospects, which remain better than most countries,” the economist stressed.