Growth is below potential since core inflation is below target, says Ashima Goyal

RBI MPC member Ashima Goyal

India's growth is below potential since core inflation is below target, according to Ashima Goyal, an external member of the Reserve Bank of India's Monetary Policy Committee (MPC).

If demand and growth exceed the potential, then inflation should be rising, not falling, Goyal told Moneycontrol in an interview. In the August monetary policy review, Goyal took part as an external member of the rate-setting panel.

India's gross domestic product (GDP) grew 7.8 percent in the March quarter, beating expectations, although it slowed from 8.4 percent in the preceding December quarter. The GDP growth rate for 2023-24 was accordingly revised upwards to 8.2 percent from the second advance estimate of 7.6 percent, data released by the Ministry of Statistics and Programme Implementation showed.

India, along with most major economies around the world, has been grappling with stubborn inflation since the ebbing of the Covid pandemic, pushing central banks to keep policy rates higher. In the past few months, however, India's core inflation, which excludes volatile food and fuel prices, has slowed to a record low of 3.1 percent in June and quickened to 3.4 percent in July.

Despite the rise in core inflation, the country's headline inflation slowed to a 59-month low of 3.5 percent in July from 5.1 percent in the previous quarter as a favourable base helped contain price pressure, according to data released on August 12.

Goyal, in the August RBI minutes, said that growth has been robust at an average of 8.3 percent for three years now. "This is beyond base effects," she added. "Something is different, including the macroeconomic policy, which effectively smoothed shocks. Rising diversity and scale have also increased the shock-absorbing capacity."

She mentioned that growth in the current year is expected to be lower than last year by almost 1 percent.

The RBI, in the August monetary policy, pegged the GDP growth at 7.2 percent for FY25. It projected the real GDP for the first quarter at 7.1 percent and second quarter at 7.2 percent, while predicted slight improvement in the third quarter at 7.3 percent, and back to 7,2 percent in the fourth quarter.

On the growth front, RBI Governor Shaktikanta Das said the government's thrust on capex, coupled with robust balance sheets of corporates and banks, will help boost the fixed investment activity in the country. He also said that there were clear signs of private investment picking up.

Further, Goyal said the RBI not sterilising the effect of government spending on liquidity indicates an easing of its liquidity stance.

Since the formation of the new government and announcement of the budget, spending by the government has picked up substantially leading to excess liquidity in the banking system.

To combat this liquidity and maintain the overnight rates, the central has been conducting various variable rate reverse repo (VRRR) auctions. But, this is also not helping to keep liquidity tight.

Despite various auctions, the liquidity in the banking system still remained in the surplus mode.

According to RBI's data, currently liquidity in the banking system is estimated to be in surplus of around Rs 79,818.64 crore.

In the August meeting minutes, Goyal said that market rates are coming down as liquidity improves with government spending.

The call money rate is also near the repo rate. This should be maintained, Goyal added.

"Adequate liquidity is required along with prudential policies that create good incentives for the financial sector, especially since the sources of liquidity are limited for many parts of India’s financial sector leading to liquidity hoarding. Balance requires that overstrictness is avoided," Goyal said.

When asked on the change in stance front, Goyal said decision of the central bank on the monetary policy stance and rate cut will be data dependent.

"The decision will be data-based so watch what happens to inflation and growth over the next few months," Goyal said during the interview.

In August monetary policy, the RBI has kept interest rate unchanged at 6.50 percent and maintained the stance of 'Withdrawal of Accomodation'.