MC Exclusive | India’s rate-setters on growth, inflation and forward guidance

Shashanka Bhide: The domestic economy appears to have sustained the projected growth momentum in Q1 FY23. While the external environment is a concern, improving capacity utilisation in manufacturing and resolution of some of the supply bottlenecks are positives for sustaining growth momentum. About 7.2 percent growth in FY23 is a realistic projection.

Ashima Goyal: If there is a global slowdown, 7 percent-plus will be a very good growth rate for India to achieve. It may fall towards 6 percent in FY24.

Jayanth Varma: On the negative side, two things are absolutely clear. One, the global environment is distinctively more hostile than it has been for the last 15-20 years. Second, we know the pandemic had a lot of short-term impact on the economy. What we do not know is if it has left behind permanent scars.

On the positive side, we have practically had no capex for a very long time. We are getting to the point where capacity utilisation is normalising. Logically, investments should start. That would open up a big engine of growth. The early signs are that at least consumption is recovering from the pandemic. We can debate about the shape of the recovery, but it is very clear that at least people with money are now spending. That’s the second growth engine. So, I am cautiously optimistic that with capex reviving, we can see the business cycle turn. But there is no escaping the fact that global environment is very, very hostile.

Inflation

Shashanka Bhide: The important point about July numbers is in the relatively unchanged levels of CPI compared to June. The overall price levels seem to have stabilised. However, on year-on-year basis, the price rise remains significant. The impact of government's measures in terms of taxes and tariffs have a significant impact in the short term. The other steps take longer to show the impact.

Headline inflation rate has remained above 6 percent for several months now. Bringing down the expectations of inflation closer to the target 4 percent is the key policy goal. The present projections suggest decline in inflation rate to 5 percent in Q1 FY24, well within the tolerance band.

Ashima Goyal: The target has been exceeded because of prolonged global shocks. The tolerance band is there precisely to accommodate such shocks. We are finally seeing commodity prices falling and supply chain issues being resolved. Excess inventories with firms are putting downward pressures on demand and prices. So we may see inflation fall faster than expected.

Jayanth Varma: I think all factors are coming together; the government’s supply-side responses are helping us, the global downturn in commodity prices is helping us. But it is ultimately monetary policy that will ensure this reduction in inflation is sustained.

I am very clear that it is important to bring inflation down close to 4 percent as quickly as possible. I have been very consistent that the 2 percent band on either side of 4 percent is only a cushion to deal with shocks. Let’s say we design monetary policy with a certain macroeconomic picture in mind, and inflation is at 4 percent. Then something unexpected happens and our projections go haywire. Inflation moves away from the 4 percent target and ends up at 5 percent. That’s OK.

As we confront this crisis, we have to bring inflation down to 4 percent quickly because otherwise we will be utterly defenceless against the next crisis.

Forward guidance

Shashanka Bhide: The stance essentially implies that we are still focused on the need to abate the inflation pressures as the prevailing inflation rate is well above the upper level of our tolerance band. Anchoring inflation expectations close to the target is necessary to achieve this target and also the goal of economic growth.

Ashima Goyal:  It has been clarified that withdrawal of accommodation is defined in terms of liquidity, so the market should not infer anything about the terminal repo rate from the stance.

Since the pandemic time saw extraordinary accommodation, defining the stance in terms of this (liquidity) is appropriate at present. The very large global uncertainties make it difficult to define a neutral rate or terminal repo rate and give a stance based on this. Since the policy is data-based, forward guidance can be inferred from the incoming data.

Jayanth Varma: Each person has a different interpretation of what ‘withdrawal of accommodation’ means. I think we should either have a dictionary (laughs) to clarify what we mean by these words – calibrated, withdrawal, focus, and so on. Or we use words that are clear.

I have been saying for two meetings now that quantitative projections are better because then you don’t need a dictionary to interpret what the MPC says. The concern has been that if the MPC is too clear about its guidance, it ties down its hands. But if it really believes that, the answer is to drop the guidance and say we will take each meeting as it comes based on incoming data. So I personally do not see much value in the form in which the guidance is being given.