India central bank’s plan keen to keep growth steady

THE pace of interest rate increases should be calibrated from here on to ensure economic recovery in India does not stall as the central bank tries to bring inflation within its tolerance band, monetary policy committee member Ashima Goyal said.

“We need to be very careful that growth is not snuffed out and we don’t go into another decade of slowdown,” Goyal, an external member of the sixmember monetary policy committee headed by the Reserve Bank of India (RBI) governor, told Reuters on Tuesday (13).

Inflation in India has remained above the RBI’s two per cent to six per cent tolerance band for eight consecutive months and rose to seven per cent in August, driven by surging costs of food items.

“It has been multiple supply shocks I would say,” Goyal said, referring to the current high level of inflation.

“And there is generalisation in the sense that it has continued for a long time and some inputs costs have been passed on.”

The RBI has raised rates by 140 basis points since May and analysts expect another 35-50 basis points increase in its next review at the end of this month.

Unlike in developed markets such as the United States, fiscal stimulus in India has been limited and labour market conditions are not tight, Goyal said.

While the Indian economy is also seeing pent up demand, other indicators such as industrial production have signalled some slowdown.

“We have to watch the data very carefully and in my view, yes, go very slowly and not be in a hurry to reach a terminal rate because the last decade we have seen the terminal rate was such that it triggered a slowdown and it really persisted,” Goyal said.

In a working paper published this month, Goyal and her co-author Abhishek Kumar wrote that recent policy decisions by the RBI were in the right direction where the bank approached the inflation originating from a food price shock more pragmatically.

Inflation management cannot be singularly left to monetary policy, finance minister Nirmala Sitharaman said last week.

“India’s solution to handling the economy, part of which is handling inflation also is an exercise where the fiscal policy, together with the monetary policy has to work,” Sitharaman said.

The inflation-adjusted real rate should move into “positive territory but very slowly because we are coming out of a slowdown,” according to Goyal.

Alongside monetary policy tightening, the government has taken steps such as curbs on exports of wheat and rice to cool food inflation. (Reuters)