RBI not ‘behind the curve’ on rate hike; never wise to overreact to shocks: Ashima Goyal


Ms. Goyal answered a question about why the RBI didn’t raise interest rates much sooner despite rising inflation

Ms. Goyal answered a question about why the RBI didn’t raise interest rates much sooner despite rising inflation

Monetary Policy Committee (MPC) member Ashima Goyal said on Sunday that the Reserve Bank of India is not “behind the curve” in raising interest rates to combat rising inflation, stressing it is never wise to rely on shocks overreacting when the economic recovery is shaky in the wake of the coronavirus pandemic.

Ms Goyal, also a prominent economist, acknowledges that India is “particularly vulnerable” to the combination of food and crude oil inflation sparked by the Russia-Ukraine war and said rate hikes should be balanced with economic recovery will.

Her comments come days after the MPC, the central bank’s rate-setting body, surprised markets by raising the repo rate by 40 basis points at an off-cycle meeting this month. It was also the first rate hike since August 2018 amid rising inflation.

“The RBI began rebalancing liquidity last year while the Federal Reserve has yet to start contracting its balance sheet as inflation is well above its target,” she said PTI in an interview.

While noting that inflation has just breached the RBI’s tolerance band due to the protracted war between Ukraine and Russia, Ms Goyal said Indian demand and wages are “soft”.

“In the US, there was overstimulation due to high government spending. The job markets are tight. The Fed may be behind the curve, the RBI is not. India’s inflation trajectory differs from that of the US,” she stressed.

Ms Goyal answered a question as to why the RBI hasn’t hiked interest rates much sooner despite rising inflation and whether the central bank will fall a bit behind the curve compared to the US Federal Reserve in this regard.

Earlier this month, the US Federal Reserve raised interest rates by 50 basis points.

On the domestic front, retail inflation rose to an eight-year high of 7.79% in April this year and the RBI is likely to tighten further.

Inflation galloped in April for the seventh straight month. The RBI has been mandated by the government to ensure inflation stays at 4% with a 2% margin either side.

According to Ms Goyal, ensuring that real interest rates do not deviate too far from equilibrium levels and avoiding excessive volatility in interest rates would help to maintain a balance between growth and inflation.

She also pointed out that after the global financial crisis, real interest rates were deeply negative leading to overheating and oscillated to high positive numbers in the 2010s, exacerbating the slowdown.

“The rate hike should be aligned with the recovery. That way, the growth sacrifice needed to moderate inflation amid prolonged supply shocks can be minimized,” she said.

The inflation forecasts the MPC is reacting to were broadly within the tolerance band, Ms Goyal said, adding that growth was still recovering from the pandemic and the threat of further waves was still strong when the MPC met earlier . She was referring to the meetings prior to the May 2-4 off-cycle meeting.

“It is never prudent to overreact to a first-round shock, even if it follows a series of previous shocks, especially when the country is in a shaky recovery from a pandemic,” she said, adding that long-term price pressures have emerged in India first after the start of the Ukraine war on February 24.

Noting that markets are overreacting to fears and already pricing in large rate hikes, Ms Goyal said: “MPC actions at this point may have resulted in large rate hikes and excessive volatility in markets.” India is “particularly vulnerable to the combination.” from food and crude oil inflation that the war induced,” she noted.

Asked whether the fuel tax cut will dampen inflation, she said inflation is high as multiple supply shocks have followed one another, although the recovery in some sectors is also affecting capacity.

“Countercyclical fuel taxes can reduce the production sacrifices needed to contain persistent inflation during supply shocks,” she said.

Fearing huge volatility in capital outflows from countries like India on expectations of further rate hikes by the Fed, she said India’s careful process of sequencing and limiting inflows of foreign capital has ensured that that capital is not excessive relative to India Domestic market.

“We see domestic and foreign investors taking opposing positions in the stock market,” Ms. Goyal said, adding that diversity makes markets more stable.

Most interest rate-sensitive debt flows have already flowed out, she said, noting 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 India’s growth prospects, which remain better than most other countries,” the economist stressed.

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