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Informist, Friday, Jul 19, 2024

 

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NEW DELHI – The neutral rate of interest is a theoretical abstract concept and cannot determine monetary policy in the real world, Reserve Bank of India Governor Shaktikanta Das said today. 

 

Das' remarks come a day after the RBI in its staff paper said India's natural rate of interest – the real interest rate that is neither expansionary nor contractionary for the economy – rose to 1.4-1.9% during Jan-Mar from 0.8-1.0% in Oct-Dec 2021. The natural rate of interest of 0.8-1.0% for Oct-Dec 2021 was also revised upward to 1.1-1.3%, reflecting the revisions in GDP data, the paper said.

 

"The neutral rate of interest is subject to a lot of uncertainty. It depends on your assessment of potential growth versus my assessment of potential growth, or versus somebody else's assessment of potential growth," Das said today at the FE Modern BFSI summit. "So, the target is inflation. Monetary policy has to be geared to achieve that, keeping in mind the objective of growth. Neutral rates etc are theoretical abstract concepts that cannot determine policy in the real world."

 

Citing the RBI staff paper, Das said that the earlier neutral rate of 0.8-1.0% was immediately in the aftermath of the COVID-19 pandemic when potential growth was low, but now that the impact of COVID-19 was well behind us, the potential growth had gone up, and the neutral rate of interest was now pegged in the range of 1.4-1.9%. So, even if one were to argue that real rates were high, it wasn't so because the range of real rates was 1.4-1.9%. Real interest rate is the nominal interest rate adjusted for inflation.

 

The governor also emphasised that while making monetary policy decisions, the RBI's target was not the neutral rate of interest, but inflation. 

 

Using the "elephant" metaphor for inflation again, Das said, "The elephant is overall moving towards the forest but its taking pauses. It's moving very grudgingly at a slow pace. When you are on a path of deflation, the last mile before reaching the target is always very sticky...The elephant is getting distracted time to time, but it is unidirectional; it is moving towards 4%."

 

Pointing out that food inflation was a point of worry, Das said the central bank was watchful of the spillover of the Wholesale Price Index to the Consumer Price Index. "With regard to WPI, and its spillover and impact on CPI, we are very watchful. WPI also, the food component has gone up, so it is today the food inflation which is drawing our greatest attention, because that is actually giving push to the headline number, because core inflation as well as fuel inflation are quite low," he said.

 

India's annual inflation rate based on the Wholesale Price Index rose to a 16-month high of 3.36% in June because of a jump in wholesale food prices. Wholesale food inflation rose to a 22-month high of 8.68% in June. Annual inflation based on the Consumer Price Index rose to a four-month high of 5.08% in June, mainly because of a surge in food prices.  

 

On growth, Das reiterated that the central bank was optimistic that the 7.2% GDP growth target for the current financial year would be achieved. He said that the RBI monitored growth numbers very closely and, even with current interest rates, India's growth story was very robust. India's GDP grew 7.8% in the quarter ended March and 8.2% in 2023-24 (Apr-Mar).

 

The governor said urban consumption had revived very well after COVID-19, and rural consumption had also picked up in the last few months. "We are very optimistic about rural consumption because the monsoon this year is doing well and is expected to do well. Agriculture is expected to do well. The crop sowing so far has been very satisfactory," he said. 

 

Agricultural production was likely to be high, which would put more in the hands of the rural people, he said, adding that a good monsoon and agricultural output had led to a fall in demand for the Mahatma Gandhi National Rural Employment Guarantee Scheme.

 

Asked about the working relationship between the government and the RBI, Das pointed to the display of strong coordination between the two during the COVID-19 pandemic. "There have been differences of opinion, because difference between fiscal and monetary authority, government and central bank are inherent in the system. There are bound to be differences because its inherent," he said.  End

 

Reported by Kshipra Petkar and Pratiksha 

Edited by Avishek Dutta

 

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