RBI governor signals no policy change despite inflation dip

“Inflation has been brought within the target band of 2-6%, but our target is 4%," Governor Shaktikanta Das said on Friday at a forum organized by The Bretton Woods Committee in Singapore. “And over the last several monetary policy meetings, we have been reiterating the importance to stay the course and not get carried away by some dips in inflation." 

Official figures Thursday showed inflation remained below 4% for a second month in August, although that was largely due to statistical reasons. The Reserve Bank of India has kept interest rates unchanged for more than 18 months already, with Das previously warning against any premature cut given worries over food costs.

Most economists don’t expect the RBI to ease borrowing costs until the final quarter of this year, predicting it will likely move only after the Federal Reserve pivots. However, some say there are signs that urban consumer demand is faltering and rates should be lowered to support economic growth. 

“With growth momentum intact and inflation expected to pick up from here on above the 4% target, now that the statistical base effect driven sharp dip is behind us, policy focus will remain on price stability to keep inflation expectations anchored," said Gaurav Kapur, chief economist at IndusInd Bank Ltd.

Das said Friday that India’s potential growth rate was above 7.5%, “but taking a more conservative position, I would like to say that it’s around 7%." India should be able to maintain that pace of growth in the next few years, he added.

Last quarter’s dip in growth to 6.7% was largely due to weaker government spending during the elections, he said. “All the other drivers of growth, whether it is consumption, investment, or on the supply side, like agriculture, industry or services, all of them have recorded 7%-plus growth in the first quarter" of the fiscal year, he added.

The governor said that the RBI doesn’t draw a line in the sand for the rupee and authorities only intervene in the foreign-exchange markets to curb volatility. 

“Some sections of the market think that the Reserve Bank has got certain lines and that the Reserve Bank doesn’t allow the rupee to depreciate beyond that. I would like to say that it is not so," Das said when asked about the ongoing currency stability. “We want a kind of orderly depreciation or an orderly appreciation. We do intervene in the market with this approach," the governor said, adding India’s strong economic fundamentals are reflecting in the stable exchange rate. 

Das also urged global monetary authorities to remain prudent and agile as inflation continues to pose a risk even as it is stabilizing in many places.

“This is also an apt time to consolidate the gains from the post–pandemic rebound with deeper structural reforms in both product and factor markets." he said.

Here’s more from the RBI Governor:

• It is necessary to have a close coordination with the government, despite being “possessive about our autonomy," he said
• “The government needs the central bank, and the central bank needs the government also equally for many amendments and changes in the law"
• Weather related uncertainties, external shocks such as high crude oil prices, geopolitical tensions and restrictions imposed by countries on international trade, are risks to India’s long term growth
• “India has emerged as a preferred destination for international investors. On the basis of my experience, I can say that there’s a lot of investment interest in India"
• A strong US dollar “increases debt service burdens and inflationary pressures for emerging markets. To what extent this scenario will get impacted would depend upon the quantum and timing of policy pivot by the US Fed, following their recent pronouncements to this effect"

--With assistance from Chanyaporn Chanjaroen, Andrea Tan and Ruchi Bhatia.

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