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Interview: MPC’s Ashima Goyal sees policy pivot if inflation approaches 4% sustainably

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Ashima Goyal, one of the three external members on the Reserve Bank of India’s Monetary Policy Committee, said markets must prepare to be surprised if they ignore what the committee says.

A “policy pivot” by the Monetary Policy Committee (MPC) is possible if inflation moves towards the Reserve Bank of India’s (RBI’s) medium-term target of 4 percent in a sustainable manner, Ashima Goyal, a member of the rate-setting panel, has said.

“A pivot is possible when it is clear that inflation is sustainably approaching the target,” Goyal told Moneycontrol in an interview following the release of the minutes of the first MPC meeting of 2023-24 on April 20.

The panel’s decision on April 6 to leave the repo rate, the rate at which the RBI lends short-term funds to banks, unchanged at 6.5 percent was against the expected 25 basis-point increase. However, the committee’s statement and the minutes of the meeting showed that the monetary policymakers would increase interest rates if needed, with Governor Shaktikanta Das insisting the decision “is a pause, not a pivot”.

One basis point is one-hundredth of a percentage point.

The MPC, however, is widely seen to have completed its rate hike cycle, especially in light of Consumer Price Index (CPI) inflation dropping to a 15-month low of 5.66 percent in March on a favourable base effect.

Economists see it falling even further in April, to under 5 percent, data for which will be available before the MPC meets from June 6-8.

Goyal, though, cautioned central bank watchers.

“If markets choose to ignore warnings they must be prepared for a surprise again. They would do well to carefully factor in how incoming data affects expected inflation and growth,” she said.

According to Goyal, the April 6 decision was a surprise to the markets “because they pay more attention to what the US Fed does than what the MPC is telling them”.

The US Federal Reserve will announce its interest rate decision on May 3. Fed funds futures prices suggest a 25 bps rate hike.

Acting on data

For Goyal, any further rate action will be data-dependent.

“If growth is resilient, the MPC may choose to focus on reaching the inflation target. It creates a useful buffer for policy if we are in the centre of the tolerance band,” the Emeritus Professor at Mumbai-based Indira Gandhi Institute of Development Research said.

The RBI expects CPI inflation to average 5.2 percent in 2023-24, with the quarterly forecasts ranging from 5.1 to 5.4 percent.

Recent inflation prints, however, have been influenced by statistical issues, such as the one with the cereals index of the CPI following the free provision of food grain through the Public Distribution System starting January.

While the methodology tweak undertaken by the statistics ministry to adjust for the provision of free goods pushed up inflation sharply in January to 6.52 percent, Goyal said in the April meeting minutes that the effect could reverse.

“It is important to work with updated data. But data is never perfect, especially in an economy with a large informal sector. That is why having some flexibility in inflation targeting is very important,” Goyal told Moneycontrol.

When asked if issues with the CPI inflation data could potentially lead to policy errors, Goyal said it was precisely for this reason policymakers look at a variety of data and sources of information, get feedback from different groups, and don’t focus on “very precise targets”.

Another indicator the MPC, and Goyal in particular, has an eye on is the real interest rate.

Adjusted for the RBI’s most forward-looking inflation forecast of 5.2 percent for the last quarter of 2023-24, the real interest rate is currently at 1.3 percent, above Goyal’s often-mentioned milestone of 1 percent. In the minutes, Goyal warned that a further increase in the real interest rate should be avoided.

“The current one-year-ahead real rate of 1.3 is not substantially above unity. A band is better than a precise number since there is uncertainty about future inflation. If inflation continues to soften rates may not need to rise,” she told Moneycontrol.

Semantics of stance

The monetary policy stance has been a matter of great debate within the MPC and outside it. The committee’s latest statement saw a change in the language from “focused on withdrawal of accommodation to ensure that inflation remains within the target going forward” to “remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target”.

According to Goyal, the change is “only for more grammatical correctness”. “Inflation can be progressively aligning with 4 percent even if it is not yet at 4 percent,” she said.

Having voted, unsuccessfully, in favour of changing the stance in December and February, Goyal voted along with the majority in April as it is now “with respect to the repo rate” and the increased uncertainty about potential fuel and food-price shocks required a “stronger signal” to convey that the MPC’s pause was only for this meeting.

“So I voted for ‘withdrawal’. It is stronger than neutral but less strong than ‘tightening’. Real rates are not high enough, compared to the past, to say we are in a tightening stance,” Goyal said.

Grounds for optimism

The minutes also reveal a split between the external members and the RBI’s representatives on India’s growth situation, with the latter seemingly more optimistic about the economy.

The external members flagged risks, with Goyal writing in the minutes that though growth is resilient, there are “signs of slowdown in some high frequency data”.

The central bank also upgraded its GDP growth forecast for 2023-24 by 10 basis points to 6.5 percent, bringing it in line with the projection made in the 2022-23 Economic Survey.

Goyal said there are “grounds for optimism” given India’s diversity and balanced policies, which had placed it in a “sweet spot” despite a dismal global environment.

“This becomes self-sustaining as more foreign direct investment comes in and so on… An example of how diversity sustains growth is that service exports have increased sharply although manufacturing exports have slowed with global demand,” she added.

As for the RBI’s growth forecast, seen as being on the higher side by the economists from outside the central bank, Goyal said it is lower than the 7 percent the statistics ministry has estimated for 2022-23.

“There is some slowdown, but India growth has proved quite resilient despite pluri-shocks and partly because real rates have not risen sharply into the tightening range. The global slowdown is also less severe than expected,” Goyal said.

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