Goyal of the rate group believes that a real interest rate of around 1% is suitable for the Indian economy.
Mumbai, India (Reuters) – The Reserve Bank of India does not need to keep increasing rates until prices decline because it risks exceeding the inflation-adjusted real rate, which is currently around 1% and suitable for the economy, according to an external member of the country’s monetary policy committee.
The 250 basis point rate increases since May 2022 must be permitted to make their way through the system, according to Ashima Goyal, who voted for a halt in the benchmark repo rate due to concerns that the central bank may overreach in raising borrowing costs.
“You don’t need to keep increasing nominal rates as long as inflation remains high because you’ll certainly exceed in terms of real rates,” Goyal said.
The MPC is made up of six members, three of whom are external and three of whom are internal to the Reserve Bank of India, including the governor, who has an override in the event of a deadlock.
The real policy rate, which accounts for anticipated inflation a year later, is currently around 0.9%, based on the RBI’s estimate of the consumer price index falling to 5.6% by the fourth quarter of 2023/24.
In January, inflation rose to 6.5%, far exceeding market and expert forecasts.
In 2022, a central bank research project projected India’s “neutral real rate”—the rate at which the economy is growing near potential and inflation is close to goal—to be 0.9%.
“We’re just at the start of a private investment recovery after a decade of slowing,” Goyal said.
“That is why I believe that a low positive real rate, not precisely unity but say around that, a 50 basis point plus or minus, addresses inflation and growth worries.”
Goyal was one of two members who voted against a rate increase and for the policy position to be altered from “withdrawal of accommodation” to “neutral” at the February meeting.
She stated that because the economy’s real interest rate has now reached a neutral level, altering the attitude to neutral and discontinuing withdrawal is preferable.
If the sharp increase in January inflation readings since the last policy statement continues and if it boosts the central bank’s inflation forecast, rates may need to be raised further, Goyal warned. “That’s why I believe legislation should be data-driven from now on.”
In 2016, India implemented an official inflation targeting framework, which mandates the central bank to keep the consumer price index within a 2-6% range, with the goal of bringing it down to 4% in the long term.
The goal was established at a time when inflation in developed markets such as the United States was less than 2% and India’s fiscal imbalance was smaller. In 2021, the government reaffirmed the 4% goal.
“In my opinion, we should think about the tolerance band rather than the goal until we are certain that there is no economic slowdown,” Goyal said.
“Having a countercyclical attitude has really benefited us over the last three years, but it becomes procyclical if you tighten into a slowdown.”