Informist, Sunday, Feb 25, 2024

--MPC Bhide: Concerned about projected CPI rise in Oct-Mar FY25

--CONTEXT: MPC member Shashanka Bhide speaks to Informist

--MPC Bhide: Moderate overall inflation key for sustained high growth

--MPC Bhide: Present growth momentum is holding

--MPC Bhide: Do not think that we have closed the output gap

--MPC Bhide:Consumption key to sustain current strong growth momentum

--MPC Bhide:Continued high levels of price rise of food items a worry

--MPC Bhide: Restrictive policy has clearly affected core inflation

--MPC Bhide: Rate hike transmission remains incomplete

-MPC Bhide: Liquidity should be consistent with policy rates

--MPC Bhide: Policy must address persistent food price rise concerns

By Aaryan Khanna

NEW DELHI - The projected rise in CPI inflation in Oct-Mar of 2024-25 (Apr-Mar) remains a cause for concern and merited holding interest rates at their current level, Shashanka Bhide, external member of the Monetary Policy Committee, said.

The Reserve Bank of India projects headline CPI inflation will moderate to its 4% target in Jul-Sep, before rising to 4.6% in Oct-Dec and 4.7% in Jan-Mar of next financial year. Average inflation for the next financial year is projected at 4.5%, down from the 5.4% projected for 2023-24.

"It is not just the average rate of 4.5% for the financial year, but the concern is the upturn in the projected rates in the second half of the year," Bhide told Informist in an email interview after the release of the minutes of the MPC's February meeting. "I would be disappointed if I do not see (a) sustained moderation in the headline inflation rate, which is the goal of the policy."

Even in December, Bhide had said that data must support the projected CPI inflation rate is consistently close to 4% for any change in policy. While the economist agreed with fellow MPC external member Jayanth Varma that the economy had not closed its output gap, indicating there was higher potential for growth, he was not comfortable in easing monetary policy while inflation remained above the target. At the most recent policy review, Varma voted for the first cut in interest rates since May 2020, citing high real interest rates could stifle India's growth. He was the only member of the committee to vote for a rate cut.

"I believe that achieving a moderate rate of overall inflation - reflected in the inflation target - is crucial for getting a sustained high economic growth rate as well," Bhide said. "For this reason, I believe that retaining the policy rates at their current level is necessary at this juncture."

The largest impact of tight monetary policy had borne fruit in pulling down core CPI inflation, he said, a point of relief noted by several MPC members in the minutes of the February meeting. Core CPI inflation – which excludes food and fuel whose prices can sometimes be volatile – fell below 4% in December for the first time in four years, and further to 3.6% in January. However, Bhide said he was still concerned about the persistence of price rise in the food component of the CPI basket beyond short-term spikes, which could lead to generalised inflation.

"In this sense, continued high levels of price rise of food items is a concern and monetary policy measures would have to address these concerns," the MPC member, an honorary senior adviser at the National Council of Applied Economic Research, said.

Bhide said it was expected that the RBI would maintain liquidity conditions consistent with the policy rates. He is looking at banks' lending and deposit rates, and credit growth, to understand the transmission of past rate hikes. The rate-setting panel raised the policy repo rate by 250 basis points from May 2022 to February 2023. RBI Governor Shaktikanta Das, in his statement outlining the February MPC meeting's outcome, linked the complete transmission of these to the "withdrawal of accommodation" stance the MPC maintains.

Below are edited excerpts from the interview:

Q. You have called the growth momentum surprisingly strong. In the two weeks since the MPC outcome, we've had more clarity on the rabi crop and other indicators. Would you say we are poised to sustain this growth outperformance into FY25?

A. The present assessment of strong GDP growth of 7% in 2024-25 reflects the present momentum of the economy assuming a normal monsoon in 2024. As I have mentioned in my statement, consumption growth would be the key driver to sustain the present momentum of growth.

Q. Are you satisfied with the pace of rate transmission to the broader economy? What is the indicator you are tracking for this?

A. It is recognised that monetary policy transmission works with uncertain lags. In the present situation, the impact of restrictive monetary policy appears to be more clear on core inflation. As far as growth is concerned, the present pace of the aggregate economy has been achieved, with favourable factors such as the strong capex spending by the government on the demand side and the moderate input prices on the supply side. However, looking at the bank lending and deposit rates, the transmission remains incomplete. I would be looking at lending and deposit rates and credit growth to understand the transmission.

Q. Even though you may have voted exactly for a status quo in the policy, the real monetary conditions in the economy will be determined by the RBI's liquidity management. As an MPC member, is it your guidance to the RBI to maintain monetary conditions exactly as they were in Dec-Feb, or to tighten or loosen them?
A. It is expected that liquidity conditions are consistent with the policy rates. Any inconsistency would be due to

short-term mismatches.

Q. You mentioned that food inflation remains the greatest risk to headline inflation. Monetary measures are often seen as less effective against such shocks. Is that enough justification to keep interest rates high?
A. Short-term spikes in some of the prices, including food, may not have spillover effects on other prices. We need to be concerned about generalisation of these price trends in specific items of the consumption basket. In this sense, continued high levels of price rise of food items is a concern and monetary policy measures would have to address these concerns.

Q. Professor Varma has accused other MPC members of being pessimistic on growth and stifling its potential by keeping the repo rate at 6.50%. What do you think India's potential growth rate is? Or has the economy already closed the output gap created before and during the pandemic?
A. I believe that achieving a moderate rate of overall inflation - reflected in the inflation target - is crucial for getting a sustained high economic growth rate as well. For this reason, I believe that retaining the policy rates at their current level is necessary at this juncture. I do not think that we have closed the output gap.

Q. If growth continues to outperform, would it surprise you if there were no repo rate cuts at all until October – when the current MPC's term ends – since inflation is projected at 4.5% for 2024-25, above the target?

A. It is not just the average rate of 4.5% for the financial year, but the concern is the upturn in the projected rates in the second half of the year. I would be disappointed if I do not see sustained moderation in the headline inflation rate, which is the goal of the policy.

Q. During the Monetary Policy Committee meetings, would you say there is a growing disconnect between the members on what measures to look at (complete transmission of repo rate hikes, high real interest rates etc.) in order to justify their votes on the policy rate and stance? What is the measure you'll look at the closest as a signal for a change in the current policy?
A. In the present context, I would focus on the assessment of the inflation trajectory in the medium term of the next few quarters and the policy options to achieve the target. The present growth momentum is holding.

End

Edited by Vandana Hingorani

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