All price-setting bodies should internalise 4% inflation target, says MPC's Ashima Goyal

Ashima Goyal is one of the three external members on the Reserve Bank of India’s Monetary Policy Committee.

All Indian price-setting bodies should "internalise" the Reserve Bank of India's (RBI) inflation mandate of 4 percent in their own decision-making, Ashima Goyal, one of the three external members on the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC), has said.

"One thing that the MPC has been trying to communicate is that all regulators and authorities with price-setting power, such as the CACP, should internalise the 4 percent inflation target," Goyal told Moneycontrol following the release of the minutes of the October 4-6 meeting of the MPC on October 20. "Because if they give, say, a 14 percent price hike, it becomes difficult for the MPC to keep inflation at 4 percent."

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The Commission for Agricultural Costs & Prices, or CACP, is an advisory body that recommends the Minimum Support Price (MSP) for 23 agricultural products. On October 18, the Cabinet raised the MSP for six rabi crops for the 2024-25 marketing season by up to 7 percent.

Increases in the MSP of crops can push up food inflation, which, in turn, impacts Consumer Price Index (CPI) inflation — the RBI's target indicator. However, economists say the actual impact of MSP increases on retail inflation depends on the government's procurement strategy and prevailing market prices.

Amid high food inflation, which hit a 42-month high of 11.51 percent in July because of deficient rainfall and supply disruptions, the government has restricted the export of a number of food items, including wheat, rice, and onion, as well as other supply-side steps to help keep a check on domestic food prices. While food inflation, along with the headline retail inflation rate, has eased significantly since then, uncertainties remain and the government continues to intervene on the supply side, with the latest step being an extension of the restrictions on export of sugar beyond this month.

According to Goyal, a move to a more market-determined system will ensure reduced interventions.

Also Read: Trade measures can ease food inflation only in short run, says MPC's Shashanka Bhide

"But it takes time to gradually move towards such a system. We have seen some convergence in prices across parts of the country. As India becomes a developed country, it will lose certain safeguards and we will see more convergence between domestic and international prices," Goyal said.

Road to 4%

Although inflation has fallen sharply in the last two months from July's 15-month high of 7.44 percent, it has now completed four full years above the RBI's medium-term target of 4 percent. As per the central bank's forecasts, it may temporarily fall below the target in one quarter of 2024-25 before averaging 4.3 percent in the last quarter of the next financial year.

Goyal, though, thinks inflation can return to target earlier than what the RBI's forecasts suggest given the various factors at play: falling core inflation, recurrent supply shocks, and volatility in the Middle East, among others.

Also Read: We should accept 4-5% inflation for several quarters, says MPC's Jayanth Varma

"…you never know what effect this combination can have. It may be that we see a sustained decline towards 4 percent faster than current forecasts. So, we will wait and watch the data," she said.

"This is the last year of this MPC. The first MPC had a lot of positive factors working in its favour, including oil prices falling. We have had to contend with a pandemic and a war. Amid that if we are able to reach 4 percent along with good growth performance, that would be creditable," Goyal, Emeritus Professor at Mumbai's Indira Gandhi Institute of Development Research, added.

The four-year term of Goyal and her fellow external members Shashanka Bhide and Jayanth Varma will end in September 2024.

Markets are also taking cues from what global central banks, particularly the US Federal Reserve, are saying, with the phrase 'higher for longer', in reference to interest rates, gaining currency in recent weeks. With US interest rates at high levels—the yield on the benchmark 10-year US Treasury paper crossed 5 percent on October 23 for the first time in over 16 years—economists fear that India too may have to keep its policy repo rate higher for longer to ensure a certain interest rate differential.

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Goyal, however, thinks the need for India to maintain a minimum rate differential with the US has now reduced and that markets "seem to be fixated on the historical numbers".

"I think there hasn't been sufficient internalisation of the improvement in India's macroeconomic fundamentals because the focus always seemed to be on non-performing assets and the broader financial sector. But we have seen that the rupee is very stable. Further, the amount of long-term depreciation has been coming down, reducing the need for a minimum interest rate differential to cover that," she said.