Even as it hiked the repo rate by another 35 bps on Wednesday, RBI believes that the worst of the CPI inflation is behind us, and GDP growth prospects continue to be robust despite concerns of a global recession or slowdown.
Owing to India’s currency being relatively stable compared with some of its peers, and external debt ratios being low by international standards, Governor Shaktikanta Das believes that India stands out as an ”island of resilience in an otherwise volatile and gloomy world”.
Edited excerpts from the media address by Das and Deputy Governor Michael Patra:
Are we close to the peak of the interest rate cycle?
Das: We are living in an uncertain world, the outlook is extremely uncertain. We will keep monitoring the overall outlook and, as and when necessary, we will act. Throughout the last almost three years, we have acted whenever necessary, proactively and effectively, in all respects, and not just with regard to interest rates. When we reduced the interest rates, our effort was to act and be as nimble as possible. Now, when we have been increasing the rates since May, we have been guided by the incoming data and the outlook and evolving dynamics of inflation and growth.
Has CPI inflation peaked?
Patra: The Governor said that the battle against inflation is far from over. We remain on guard, far from neutral, until we see a durable decline in inflation and it staying within the tolerance band. But the most important thing is that we have lowered the policy rate change. After continuous 50 bps increase, it has now moderated — so that tells you of a shift in the wind. We feel the worst of inflation is over, but the moderation of inflation will be very grudging, very uneven. So, we must shepherd inflation first firmly into the tolerance band and then to the target.
What is the expectation on the trajectory of core inflation?
Das: Over the last 6-7 months, it has remained sticky around 6 per cent. Therefore, this time we placed this issue on the table because that also needs to be specifically addressed and kept in mind. But our target is defined in terms of CPI headline inflation. We analyse the headline inflation and, of course, as a part of that all aspects, including food, non-food, non-oil and fuel inflation trends, are analysed. But separately, we don’t give future numbers for core, fuel or food.
Why is core inflation sticky?
Patra: There are many factors that are playing out. One, for instance, is the pass through of input costs. Q2 corporate results showed that expenditure growth has been outpacing revenue growth, mainly because of the pass through of input costs. There is also the exchange rate pass through, so imported inflation pressures get in. We are also noticing non-tradeables — services — where inflation tends to be very stubborn; those prices have now started to rise. These things warn us that we need to be on our toes about the second round of inflation, because they can generalise or spread into other categories. We’re also trying to show people that we are on the job and will bring down core, that is already visible in the perceptible decline in inflation expectations.
India is a bright spot, but how long can it stay decoupled from global pressures?
Das: India is an island of stability in a very turbulent world. In an inter-connected world, we cannot be entirely decoupled from what is happening in the rest of the world. In certain aspects, India appears to have decoupled, but It’s not black and white. When we talk of spillovers, they impact all emerging markets including India.
The RBI has said it will continue to battle inflation. Is growth not a top priority for the MPC now?
Das: There are opportunities available to India to attract and undertake more investments, coming out of innovations in technology, climate change opportunities and PLI. But inflation management is important not just for its own sake. The aspect of price stability is essential for medium term growth. If inflation goes very high, investors will stop investing. There is no contradiction between the two.
Is the ballooning CAD a concern for the RBI?
Das: CAD is eminently manageable. Our remittances are focussed and grew 22.6 per cent in Q1. Services exports have fundamentally also picked up, there is data to show that the global IT expenditure is also rising. So, therefore, it will all depend on how the situation evolves.
Patra: When MPC is withdrawing accommodation, it obviously wants to modulate aggregate demand to align with supply and that affects all categories, including imports. But India’s imports have a structural character where many parts are essential. Also keep in mind that if you want to step up growth, you have to run a little higher CAD. But we are not too worried, because we have buffers and as the growth rate changes, the size of CAD which is viable, also changes.
Is the RBI in talks with banks over the widening gap between deposit and credit growth?
Das: The RBI doesn’t give any direction to banks with regard to their interest rates, on either side whether credit or deposit. They have to be seen in the proper perspective. Credit growth is on a low base, deposit growth is on a high base. That is why they look to be so divergent.
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