‘Monetary policy in India must respond nimbly to 2nd inflation round’

SHANAKA JAYANATH (JAY) PEIRIS, the lead author of the International Monetary Fund’s (IMF’S) “Asia and Pacific Outlook”, tells Indivjal Dhasmana while the Federal Reserve’s move to raise key benchmark rate by 50 basis points was largely anticipated, any large movements in global equity markets from a sharper than expected tightening in advanced economies would have implications for equity outflows from India. He talks on the Reserve Bank of India’s (RBI’S) rate hike, India Inc’s debt, and export prospects. Edited excerpts.

“The Outlook”, released last month, says a rise in US interest rates will have significant spillovers for Asia. How do you see the impact of half a percentage point increase in the benchmark rate by the US Federal Reserve on Asia, particularly India?

Compared to the taper tantrum period in 2013, Asia is well prepared in terms of its external buffers, as most countries have higher foreign reserves and current account balances. But at the same time Asian economies are also more indebted. So, Asia may be able to weather better the short-term impact on capital flows and external pressures due to Fed normalisation. But it will be surely affected by rising funding costs.

The increase of half a percentage point in the benchmark rate by the US Federal Reserve was largely expected by the markets. But the action needs to be viewed as part of the ongoing tightening cycle, which would increase pressures on interest rates and funding costs across the emerging markets, including India. Furthermore, any large movements in global equity markets from a sharper than expected tightening in advanced economies would have implications for equity outflows from India.

How do you assess the RBI’S move of raising the repo rate by 40 basis points since the IMF had suggested such a measure?

As far as India is concerned, we welcome the RBI’S recent policy action — the increases in the policy rate and the cash reserve ratio — against the backdrop of elevated and broadbased inflation risks. Looking ahead, monetary policy will need to respond nimbly, including through well-communicated expectations about the trajectory of inflation and the path of policy rate actions.

After the rate increases, what kind of fiscal policy will you recommend for the government?

A more accommodative fiscal stance, with additional support targeted towards vulnerable households, is warranted, given weaker growth prospects. In that context, the Budget’s conservative revenue projections provide some space for additional support. While there is fiscal space in the near term, India will need to implement an ambitious fiscal consolidation strategy in the medium term.

The IMF’S new growth projection for India — though reduced, at 8.2 per cent — is higher than that of the RBI at 7.2 per cent. What are the reasons for the IMF to be so optimistic?

The 8.2 per cent growth projection in FY23 partly reflects a continued catch-up in domestic demand following three waves of the pandemic. In other words, the growth projection reflects a rebound from a low base. In addition, the 8.2 per cent projection reflects a strong statistical carryover from the growth momentum at the end of the last fiscal year.

“The Outlook” says a spike in food and commodity prices will have an inflationary impact. Should India continue with its programme of free food supply for the vulnerable sections and, if so, till when?

The Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) played an important role during the pandemic. Against the backdrop of higher food and other commodity prices, additional targeted support to vulnerable households is warranted.

Your presentation in New Delhi suggests that lower demand in Europe will weigh on the region’s growth. However, India’s exports have been rising. Why?

According to the preliminary data for April, export growth was broad-based and led by petroleum products (reflecting mostly price effects), electronic goods, organic and non-organic chemicals, textiles, and engineering goods, while exports of rice, gems, and jewellery moderated slightly. Moreover, we project robust export growth to continue, which should add to economic growth in India. However, the spillovers from the war in Ukraine are projected to substantially reduce external demand growth in Europe, which is an important destination for India’s exports. Unfortunately, it means that the expansion of India’s exports will be less pronounced than it was anticipated before the war in Ukraine broke out.

“LOOKING AHEAD, MONETARY POLICY WILL NEED TO RESPOND NIMBLY, INCLUDING THROUGH WELL-COMMUNICATED EXPECTATIONS ABOUT THE TRAJECTORY OF INFLATION AND THE PATH OF POLICY RATE ACTIONS”

How do you see corporate debt hampering economic growth in India?

Further efforts to make support measures even more targeted and facilitate the exit of non-viable firms may be warranted. For instance, the authorities could consider tightening the eligibility criteria for borrowers, increasing the residual exposure of lenders, and implementing additional reforms to reduce the costs and time of exit of non-viable firms.