Any change in withdrawal stance will unsettle markets: Ashima Goyal

'Withdrawal' is now well understood to imply that the repo rate remains disinflationary and is aimed at bringing inflation towards the target, Goyal said

The Reserve Bank of India (RBI) kept the lending rates unchanged at 6.5 per cent earlier this month. Ashima Goyal, an external member of the monetary policy committee (MPC), says most forecasters, including the RBI, see inflation rising again in Q3FY25. In an email interview with Manojit Saha, she says the rise is the reason the MPC would like to see inflation sustainably approach the target of 4 per cent before lowering rates. Edited excerpts:

You have supported the 'withdrawal of accommodation stance' while agreeing with the view that stance is with respect to rates. RBI’s inflation projection suggests that the repo is unlikely to go up. In that case, why should the stance not be changed to neutral? Under what circumstances will the stance be changed?

Any change will lead to speculation and unsettle markets. ‘Withdrawal’ is now well understood to imply that the repo rate remains disinflationary and is aimed at bringing inflation towards the target, even if liquidity softens. It is better not to disturb the signal at present.

What should be the real interest rate for an economy like India?

The real repo rate should remain near the equilibrium level that restrains inflation while allowing growth to sustain. At present, since both are happening, the real interest rate is at this level. The equilibrium real rate rises in a growth boom and falls in a slump.

Do you agree with the view that growth is below its potential and that there is no overheating?

For an economy like India with large underemployment, potential growth should be defined in terms of inflation. It is below potential as long as inflation is at acceptable levels. Continuing supply-side action to reduce costs and releasing bottlenecks can increase potential growth.

RBI projects average CPI inflation at 4 per cent in Q2 of FY25 (or Q3)? Do you think the MPC should wait till inflation converges to the target before it starts cutting the repo rate?

Inflation is expected to touch 4 per cent but the RBI, as well as majority of forecasters, see inflation rising again in Q3. The MPC would like to see inflation sustainably approach the target. That is, even if supply shocks occur, their impact should be transient. Since growth remains quite robust, and geopolitics continues to be fragile, we can wait to make sure of this.

You have said that measures to ensure the weighted average call rate (WACR) largely stays at the repo rate are required. In the context, you have said: “Money market timings can be extended and market microstructure developed to enable banks to lend to each other.” Can you please elaborate?

Banks would not have to hoard liquidity in order to meet demands of 24/7 banking if they can also borrow 24/7. Heterogeneity of Indian banks may be making them reluctant to lend to each other. Clearing Corporation of India (CCIL) can develop a 24/7 platform where counterparty risk is eliminated. The SEC is proposing such a platform to increase liquidity in US money markets.