Modi Adviser Says RBI Misguided on Prices, Should Cut Rates
The RBI did not respond to an email or phone call seeking comment.
By
Kartik Goyal
Updated on
RBI’s view of the economy ‘doesn’t seem to be correct’: Goyal
Central bank has room to reduce interest rates by 100bps
The Indian central bank’s tendency to overestimate
inflation has prevented it from cutting interest rates further and cost
the economy, according to one of Prime Minister Narendra Modi’s
advisers.
“Their view
of the economy doesn’t seem to be correct,” and by keeping rates high,
they “have imposed a high output sacrifice,” said Ashima Goyal, a member
of Prime Minister’s Economic Advisory Council. "They believe inflation
will rise, but you know their predictions of inflation have always been
overestimated."
While
the central bank’s CPI forecasts are wrong, its notion that keeping
rates higher will anchor inflation expectations has also worked against
them and proved to be a drag on growth, Goyal said in an interview last
week. The RBI has room to reduce rates by 100 basis points as CPI will
remain within its target range of 4 percent plus/minus 2 percent and as
India doesn’t need real rates of more than one percent, she said.
The RBI did not respond to an email or phone call seeking comment.
“They
have been working through the aggregate demand channel to reduce
inflation but aggregate demand channel is weak in India,” said Goyal,
who earlier served as a member of the RBI’s technical advisory committee
on monetary policy. Decreasing aggregate demand, “decreases output, and
has the first effect on output and little effect on inflation."
The
$2.3 trillion economy is likely to grow 6.5 percent this fiscal year as
consumption and investment remain sluggish, she said. That would be the
slowest pace of growth since 2014. Data last week showed gross domestic product grew 6.3 percent in the July-September quarter, rebounding from 5.7 percent in the previous quarter.
“The recovery is there but it’s not large,” she said. “There
are demand constraints. So, therefore, whatever space there is --
fiscal, monetary -- should be used.”
Inflation will remain under
control due to a “secular downtrend in commodities,” better supply
management of pulses by the government, improvements in agricultural
marketing and the expectation that oil prices will remain lower, she
said.
"The RBI has over-delivered on its inflation mandate," said
Abhishek Gupta, Mumbai-based India analyst with Bloomberg Economics.
"Structural reforms are lifting potential GDP growth, but a tight
monetary policy stance by the RBI is restraining consumption and
investment demand."
The central bank in April 2014 forecast 8 percent CPI by January 2015, but the actual reading was 5.2 percent. Similarly, in April 2015, it predicted CPI at 5.8 percent by March 2016, while it cooled to 4.83 percent and in early 2016 when it called for 5 percent CPI by March 2017, it was 3.89 percent.
“Since
2014, when the oil prices fell, they have not really believed that this
fall is sustainable, they keep expecting inflation to rise and rise,”
she said.
Urjit Patel became RBI governor in September 2016, taking over from Raghuram Rajan.
Expectations
the central bank will keep interest rates on hold in its Dec. 6 policy
decision have weighed on rupee bonds, along with fears of a wider
government budget deficit. The yield on the benchmark 10-year sovereign
notes climbed four basis points Monday to 7.09 percent, set for its
highest close since Sept. 2016. The rupee gained 0.3 percent to 64.29
per dollar.
Goyal is also critical of the central bank’s belief that keeping interest rates high will curb inflationary expectations, which she says are guided more by the commodity and food prices.
“Estimates
have shown that oil prices, food prices affect inflationary
expectations more than other things, more than high interest rates,” she
said. “When you are on a secular downward trend for commodities, shale
oil coming in and you have reforms kicking in agriculture, I mean the
RBI should have strongly communicated this. I think, it would have
helped anchor household inflation expectations.”
