RBI CAN STAY ACCOMMODATIVE EVEN WITH RATE RISES: MPC’S GOYAL

MUMBAI: The Reserve Bank of India’s (RBI’s) monetary policy will remain accommodative even if borrowing costs start rising this year, according to a dovish member of the central bank’s rate-setting body, because the banking system is awash with liquidity and positive real rates are still a long way away.

“It is possible that rates go up and yet there is accommodation because durable liquidity will remain in surplus and real rates will remain below neutral in the early stages of withdrawal of accommodation,” Ashima Goyal, one of the six members of the Monetary Policy Committee (MPC), said in an email interview. Goyal said she was not speaking on behalf of the rate panel.

The MPC this month kept its benchmark rate at 4% for a record 11th straight meeting, while deciding to focus on withdrawing accommodation in the days to come. The pivot came after a surge in consumer prices to near 7% sent the real interest rate, or adjusted for inflation, deeper into negative territory.

That would erode returns for domestic savers, as well as investors in a country where the 10-year sovereign bond yield averaged 6.4% in the past one year.

In the minutes of the latest monetary policy meeting released last week, Goyal said that as long as real rates are kept below the pace of economic expansion, it will help in reducing fiscal stress and lower the government’s budget deficit and debt ratios over time.

If the MPC sees price-growth persistently exceeding its tolerance band of 2%-6%, “rates will go up in an inflation targeting regime”, Goyal said. As a first step, the RBI needed to remove excess liquidity through other instruments so that short term rates rise. That mirrors the view of her rate panel colleague and also its most hawkish member, Jayanth Rama Varma, who in a separate interview said the main repurchase rate can climb now to counter inflation.