'Would have liked to see RBI-staff MPC members also dissent sometimes'

Goyal, who voted for rate cut in both June and August review meetings, says that she does not see any broad-based rise in core inflation

Ashima Goyal, external member, Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC), who voted for rate cut in both June and August review meetings, told Manojit Saha in an email interview that she does not see any broad-based rise in core inflation. The August meeting was the last one for external members who have fixed four-year tenure. Edited excerpts:

In the MPC minutes, you have said, citing the US Federal Reserve: “Since monetary policy acts with a lag, they can't afford to wait until they reach their inflation target before cutting.” In the Indian context, do you think a majority of the MPC members want to wait till inflation comes around the target before reducing the policy repo rate, which could be counterproductive?

They want to be confident it is firmly aligned to the target. The RBI is one of the pillars of the economy and we have to thank it for our relative macroeconomic stability. But since I joined the Technical Advisory Committee in 2011, I have seen the staff fear old problems will recur. Even if inflation is low, they worry it may rise again. But trend inflation is lower in India and commodity price shocks are less persistent. If change is not recognised and space available to cut is not used, the growth sacrifice is higher than it needs to be.

What is the extent of the growth sacrifice, according to your estimate, if the MPC waits till the end of the fina­ncial year for reducing the policy rate?

Firms and households will take decisions today based on higher expected real interest rates reducing consumption and investment next year. Recent Neilson and Kantar surveys show urban consumption is slowing. Growth this year is expected to be 1 per cent below last year. A possible post-election growth momentum may be lost.

Do you think core inflation has bottomed out and may inch up in the coming months? Do you see demand-side pressure emerging?

I do not see any broad-based rise in core inflation, which reached a lifetime low of 3.1 per cent — the current mild rise is due to telecom tariffs. Recent surveys show urban consumption is softening, as are commodity prices. Real interest rates affect aggregate demand. If core inflation fell steeply with a real repo rate of around unity, why will it rise now as the expected real repo rate is more than double that?

In the context of liquidity and its limited sources leading to hoarding, you have said, “Balance requires that over-strictness is avoided.” Can you please elaborate?

The RBI is wisely using counter-cyclical prudential policy to moderate sectoral excesses in credit growth. Corporate governance norms are also being strengthened. Then to also tighten monetary conditions that would reduce credit growth even where it is required would imply over correction.

August was your last MPC meeting. What would be your suggestions to improve the functioning of the committee?

The committee worked well. The RBI departments did an excellent job to make sure updated data and analysis was available to the committee. There was free and open discussion.

Questions and dissenting views deepened understanding of complex ongoing challenges. Media interactions also contributed. It is important that all views are carefully listened to before members take independent decisions. I would have liked to see RBI-staff MPC members also dissent sometimes. 

The current flexible inflation framework is in force till March 31, 2026. What will be your suggestions to improve the framework?

Headline should remain the target since it matters to the consumer and can come to serve as a benchmark for price-setting firms and regulators, including for trend food prices. But more attention paid to core and forecasts published for core inflation would reduce excessive public focus on volatile commodity prices and help anchor expectations at the more stable declining trend. If government action to reduce commodity price spikes is formalised, it may lead to longer-term productivity enhancing and market developing interventions. The MPC should also give guidance on liquidity to ensure there is no continuing deviation of the operating target from the repo rate it sets.