No hike needed if inflation within tolerance band: MPC member Ashima Goyal

In a Q&A, she explains why the rate setting panel's current focus should be to bring down inflation

Ashima Goyal, member of the Reserve Bank of India's Monetary Policy Committee, explains why the rate setting panel’s current focus should be to bring down inflation, and dwells on RBI's 6.5 per cent GDP growth estimate for FY24, in an interaction with Manojit Saha. Edited excerpts:

In the MPC minutes, you said though growth is resilient, there are signs of slowdown in some high frequency data. Has RBI over estimated growth with its 6.5 per cent projection for FY24?

Since the growth forecast is lower than last year’s CSO second advance estimate of 7 per cent, it does take into account growth, including higher policy rates. But the real rate has not been raised high enough to have a large impact on growth. Moreover, the economy has been resilient to external shocks and the global growth slowdown is also less severe than expected, so 6.5 per cent growth is feasible. In India, imports exceed exports so the external contribution to demand is negative. The estimated demand leakage through net imports is lower. This is one factor contributing to the rise in growth forecast from 6.4 per cent last time to 6.5 per cent now.

Which is the bigger risk now–growth or inflation?

Since Indian growth has proved quite resilient, the MPC can focus more now on bringing inflation to target.

You have said the real policy rate is greater than one. Are you indicating real rates are on the higher side? If so, then why did you not vote against the stance–withdrawal of accommodation?

Since the rate hike in February was only 25bps, real rates are still in an appropriate band around unity. It is better to work with a band rather than an exact number, since there is uncertainty about future inflation. The current one year ahead real rate of 1.3 is appropriate. A further hike in the April minutes could have implied overshooting. Because of weather and oil price related uncertainties, however, it was important to give a strong signal that the pause does not rule out future rate hikes if required. That is why I voted for 'withdrawal of accommodation' as the stance.

You have also said “it has already tightened enough to progressively bring inflation towards the target of 4 per cent.” Does that mean, there may not be a need to increase the repo rate?

If expected inflation does not rise above the tolerance band there should be no need to further raise the repo rate.

What would prompt the MPC to consider a rate cut?

I cannot speak for the MPC. In my view if inflation is sustainably approaching the target and expected real rates rise above what is required to reach the target, a rate cut would be appropriate.