Finance Minister Nirmala Sitharaman has made a strong case for a reduction in the benchmark repo rate by the Reserve Bank of India (RBI). Addressing representatives of India Inc and bankers at the State Bank of India’s Economic Conclave on Monday, Sitharaman said “affordable” bank interest rates are essential to support industries to ramp up and build capacities. "The cost of borrowing is really very stressful. At a time when we want industries to ramp up and build capacities, bank interest rates will have to be far more affordable,” she said.
This is the second time in less than a week that a Cabinet minister has pitched for lower interest rates.
Last week, at CNBC TV18’s Global Leadership Summit (GLS), Commerce Minister Piyush Goyal said RBI should cut interest rates.
That said, though the RBI’s Monetary Policy Committee (MPC) kept the repo rate unchanged at 6.5 percent in its recent meeting in October, it changed its stance from 'withdrawal of accommodation' to
'neutral', suggesting that there could be room for a rate cut in the December MPC meeting if concerns on inflations abate. Repo rate is the rate at which RBI lends to banks and is regarded as a benchmark rate for the economy.
Inflation issues
The consumer price inflation touched a 14-month high of 6.21 percent as against 5.5 percent in September, which according to economists might have reduced MPC’s room to cut the repo rate in the immediate future.
When asked if inflation concerns should hold back any move to reduce interest rates, Sitharaman said the top three perishable goods (onion, tomato, and potato) were causing stress in the inflation numbers. “The other core items are in the 3-4 percent range and are manageable,” she replied.
Last week, Goyal said food price inflation should not play a role in RBI’s interest rate decisions.
Responding to this comment at the CNBC TV18 event, RBI governor Shaktikanta Das said he would reserve his remarks until the next MPC meeting scheduled for December 4-6.
Should food prices be a component of inflation?
The debate on whether food prices should be considered while fixing an inflation target has been ongoing for several months, with the RBI, including its rate setting MPC, favouring their inclusion. Addressing the media post the August MPC meeting, Deputy Governor Michael Patra said the exclusion of food inflation from the rate setting process may not be an acceptable approach. "Taking into account double-digit inflation in salient food categories such as cereals, pulses, spices and vegetables for several months, empirical evidence points to a rise in the time varying persistence of food inflation, i.e., it is taking longer to revert to its trend after a shock,” Patra said in the August MPC meeting.
Earlier, the Economic Survey FY23-24 stirred the debate on whether food inflation components must be part of India’s inflation target fixed at four percent with two percent bandwidth on either side (+/- 4 percent which is 2– 6 percent range). The Survey pitched for excluding food and energy inflation.
"An important factor that can improve the swiftness and effectiveness of such action is complete clarity on prices and their indices. On this front, it may be important to finetune and expedite the ongoing action in the following areas. The high-frequency price monitoring data for essential food items collected by different departments may be linked in such a way that the build-up of prices at each stage from the farm gate to the final consumer is quantifiable and monitorable. The ongoing efforts to construct the producer price index for goods and services may be expedited to have a greater grasp of episodes of cost-push inflation. Considering that the results of the household consumer expenditure survey, 2022-23 of MoSPI are available, it may be appropriate to expeditiously revise the consumer price index with fresh weights and item baskets," the Economic Survey noted.
In other words, the Survey pitched in favour of considering core inflation, which is a measure of inflation that excludes food and energy prices for rate setting. CPI, or consumer price index, popularly referred to as the headline inflation index, tracks food and energy prices as well as prices of other household good, and key inputs such as steel and cement. Central banks in the US, Japan and Europe exclude food and energy inflation components for the purpose of assessing inflation to set their benchmark interest rates.
Tug of war on rates
Interestingly, this is not the first instance of a tug-of-war between the government and the RBI on benchmark repo rates. The last time a full-blown disagreement over rates between the RBI and the government was between 2010 – 2013 when Dr Duvvuri Subbarao was the central bank governor. Repo rates increased from 4.75 percent in April 2009 to 7.25 percent in May 2013. Notably, when Raghuram Rajan took over as RBI governor in September 2013, he hiked rates by 25 basis points to 7.50 percent in September 2013.
Rates started reducing only from January 15, 2015, suggesting that while there may be differences between the central bank and the government, the RBI usually prevails on this matter.
A recent news report by Reuters suggested that Governor Das may be given a three-year extension, when his term concludes on December 10, 2024. If this happens, this would be his third stint as RBI Governor.
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