RBI not 'behind the curve' in hiking rate
The Reserve Bank of India (RBI) is not behind the curve in hiking interest rate to tackle rising inflation, Monetary Policy Committee (MPC) member Ashima Goyal said on Sunday and asserted that it is never wise to overreact to shocks when the economic recovery is shaky post the coronavirus pandemic.
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New Delhi: The Reserve Bank of India (RBI) is not behind the curve in hiking interest rate to tackle rising inflation, Monetary Policy Committee (MPC) member Ashima Goyal said on Sunday and asserted that it is never wise to overreact to shocks when the economic recovery is shaky post the coronavirus pandemic. While acknowledging that India is especially vulnerable to the combination of food and crude oil inflation unleashed by the Russia-Ukraine war, Goyal, also an eminent economist, said rate hikes should be aligned with the economic recovery.
Her comments come days after the MPC, the central bank's rate-setting Panel, surprised the markets with a 40 basis points (bps) hike in repo rate in an off-cycle policy meeting this month. It was also the first rate hike after August 2018, amid spiralling inflation.
"RBI started rebalancing liquidity last year, while the US Federal Reserve is yet to start contracting its balance sheet, with inflation far in excess of its target," she in an interview. While noting that Inflation has just exceeded RBI's tolerance band due to the protracted Ukraine-Russia war, Goyal said Indian demand and wages are 'soft'.
"In the US, there was over-stimulus due to large government spending. Labour markets are tight. The Fed may be behind the curve, the RBI is not. The Indian inflation trajectory differs from that of the US," she stressed.
Goyal was responding to a question on why RBI did not raise interest rate much earlier despite rising inflation and whether the central bank will fall a little behind the curve compared to the US Fed in this regard. Earlier this month, the US Fed hiked the benchmark lending rate by 50 basis points. On the domestic front, retail inflation surged to an eight-year high of 7.79 per cent in April this year and RBI is likely to further tighten the monetary policy. Inflation galloped for the seventh straight month in April.
RBI has been mandated by the government to ensure that inflation remains at 4 per cent with a margin of two per cent on either side. According to Goyal, making sure the real interest rates do not deviate too far from equilibrium levels and avoiding undue volatility in rates would help to maintain a balance between growth and inflation.
