Informist, Sunday, Dec 24, 2023

--MPC Bhide: Need projected CPI near 4% routinely for policy change

--CONTEXT: MPC external member Shashanka Bhide's remarks in interview

--MPC Bhide:Agri commodity price spikes likely to be short-term issue

--MPC Bhide: Policies focused on addressing food price spikes

--MPC Bhide: Low positive real interest rate needed to support growth

--MPC Bhide: Moderate inflation rate needed to support growth

By Aaryan Khanna

NEW DELHI – For any change in policy, data must support that the projected CPI inflation rate is consistently close to the Reserve Bank of India's 4% target, says Shashanka Bhide, an external member of the central bank's Monetary Policy Committee.

"At this point, getting the inflation rate to be aligned with the target is important," Bhide tells Informist in an email interview after the release of minutes of the panel's Dec 6-8 meeting. "There has been a decline in inflation rate, but there have also been upward price pressures on the food inflation front."

In the quarters until December 2024, India's CPI inflation is expected to come down to the RBI's 4% target only once, in Jul-Sep, before picking up again in Oct-Dec. 

The minutes showed Bhide pointing to the need for monetary policy to lower inflation to the target. He had voted to continue the 'withdrawal of accommodation' policy stance.

Bhide, an honorary senior adviser at the National Council of Applied Economic Research, says adequate buffers on both the monetary and fiscal sides are required to ensure stable policy. A mechanical movement in interest rates is less relevant considering the growth and inflation shocks of the past two years, he says.

The minutes showed Bhide noting that while growth in the manufacturing sector had zoomed, services and agriculture sector growth were more moderate in Jul-Sep. According to him, lower inflation, amid a lattice of domestic and external triggers, is more important than loosening monetary policy.

"For services on the supply side and private consumption on the demand side, both domestic and external triggers, including lower inflation rate would help faster expansion," Bhide said. "Loosening the policy stance alone may not be the trigger."

Following are edited excerpts from the interview:

Q. If inflation and growth turn out to be in line with the RBI's projections, when will you vote for a stance change and a rate cut?
A. At this point, getting the inflation rate to be aligned with the target is important. There has been a decline in inflation rate, but there have also been upward price pressures on the food inflation front. Given the continued uncertainties on the inflation front, data supporting projected inflation rate consistently close to the target is necessary for any changes in policy.
 

Q. Have persistent food price shocks become normalised? When do you see these smoothening out?
A. Food commodity prices have been impacted by supply shocks not only in the domestic market, but also from a global perspective. Spikes in prices of a few commodities are not uncommon and are likely to be a short-term issue. As new challenges emerge, a resilient supply side that supports broader price stability requires investments in technology and infrastructure.    
 

Q. There seems to be a comfort in analysts' food inflation expectations post January. Do you think supply shocks will die down, considering the threats from the kharif crop and geopolitics?
A. A good rabi harvest and easing of geopolitical conflicts would be key to sustained reduction in food inflation. But in general, the policies are now focused on addressing price implications.

Q. Analysts have termed the growth-inflation situation in projections so far in FY25 as a 'Goldilocks' scenario. Do you agree with this view?
A. We have now experienced high growth and moderating inflation, particularly core inflation. Besides the domestic policy drivers of growth, weak external demand conditions have also meant lower input price conditions. But when the external conditions change, adapting to them will be necessary to sustain high growth and moderate inflation in the medium term.
 
Q. What's your ideal level in terms of real interest rates in the current economic situation? Professor Varma has said he favours mechanically changing the nominal repo rate to match his favoured real rate policy to policy. Do you favour such an active approach?
A. Low positive real interest rates along with moderate inflation rate would be needed to support growth. Unexpected and sustained supply or demand shocks in the recent two years have made mechanical policy response less relevant. Adequate buffers, both monetary and fiscal, will help in achieving a stable policy environment as well.  

Q. You have spoken about the uneven recovery between sectors. Would loosening the policy stance be an appropriate response for agriculture and services once you have some comfort on inflation?
A. In the case of consumption demand, output growth more broadly would be important. For services on the supply side and private consumption on the demand side, both domestic and external triggers, including lower inflation rate, would help faster expansion. Loosening the policy stance alone may not be the trigger.

 
Q. Overnight rates have been above the Liquidity Adjustment Facility corridor for most of Oct-Dec. Do you think this is an overreach by the RBI in tightening financial conditions beyond what the MPC intends with the 6.50% repo rate and the 'withdrawal of accommodation' stance?
A. There were spikes in overnight rates and also drops. A number of factors have led to the spikes and the policy responses have addressed immediate situations and also structural issues. Policy rates and the stance are the core of the policy.  End

Edited by Avishek Dutta

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2023. All rights reserved.