Lesser rate hikes will be needed if CPI falls below forecasts: Ashima Goyal

Liquidity should be in surplus as long as Fed's quantitative tightening continues

Several factors, including a decline in global crude oil prices, point to the likelihood of future inflation readings falling below the Reserve Bank of India’s forecasts, Ashima Goyal, a member of the Monetary Policy Committee told Business Standard’s Bhaskar Dutta. If inflation does indeed come in below the RBI’s projections, less of a rise in rates will be required, Goyal said.

Edited excerpts:

You have mentioned in the recent MPC minutes that growth has sustained despite rate increases and global shocks. The RBI is projecting CPI inflation above 6% till Jan-Mar. Does this call for more frontloading of rate hikes?

Crude oil prices have fallen below the value of $100 the RBI has assumed in its inflation projections.

If this continues RBI projections are likely to be overestimates. A global slowdown, supply-chain bottlenecks finally resolving and excess inventories with firms are all downward pressures on inflation. Further hikes will depend on incoming data. If inflation comes in below projections then less of a rise in rates will be required.

In the previous MPC minutes you had suggested minus 1 per cent as the lower limit for the one-year ahead real repo rate. What is your suggestion for the one-year ahead repo rate now?

The time varying neutral rate that keeps inflation constant depends on data. In current conditions I would say 1 is an upper bound for the real repo rate.

Since the COVID-era rate cuts have been reversed, the accommodation that remains is in terms of liquidity. In your view, how long would the withdrawal of this accommodation take?

In my view liquidity should remain in surplus as long as the US Federal Reserve’s quantitative tightening continues. Then the RBI will have room to compensate for global and other shocks to domestic liquidity.

You mention in the minutes that demand-reducing positive real rates could help when it comes to overseas investment. Does this exert pressure to raise rates further?

I have clarified that in India’s inflation targeting regime the policy rate is mandated to respond only to inflation and growth, not to the exchange rate. I mentioned in the minutes that demand-reducing positive real rates would help reduce the current account deficit by reducing import demand. The data suggests overseas investment is not very sensitive to Indian interest differentials.

You have emphasized the importance of a soft landing. How much growth sacrifice would be tolerable in a situation where the 4% medium-term target is not yet within the RBI’s forecasts?

If supply shocks continue to unwind, and other supply-side action is taken, we may reach the target without much growth sacrifice. A credible regime itself helps expectations converge. Before the Ukraine war the RBI’s one-year ahead inflation forecast was 4.5 per cent, within reach of the target.