India’s monetary policy is independent of the Fed and is capable of meeting the needs of its own domestic cycle.
Intro: Ashima Goyal, external member of the Monetary Policy Committee, said: Credit growth has been outpacing deposit growth for some time and banks cannot continue to rely on short-term borrowing term and liquidity to meet demand. She told Piyush Shukla that the target is for inflation not to reach 4% but to maintain it there. Excerpt:
As you mentioned in the MPC minutes, the US Federal Reserve’s scope for further interest rate increases is limited. Does MPC have similar thoughts? India’s monetary policy is independent of the Fed and is capable of meeting the needs of its own domestic cycle. It doesn’t have to follow the Fed. Policy decisions depend on new data and their impact on forecasts. The market should base their expectations on these factors.
But the Fed’s recent decision suggests its policy may remain restrained and focused on achieving its inflation target, even as interest rate cuts are forecast. This policy will reduce inflation if real interest rates are positive and above neutral.
Do you expect the increase in repo rates to deposit rates to continue to be transmitted? Currently, credit growth has outpaced deposit growth. Banks cannot rely solely on liquidity and short-term loans but must take steps to increase deposit growth. What they do is up to them. Some transmissions continue automatically. When old deposits mature, they will be renewed at a higher interest rate than the current one.
When can we expect retail inflation to hit the 4% mark? Reaching 4% is not enough, we have to stay there. Many previous forecasts of inflation near 4% were shattered by the supply shock. The good news is that these shocks are becoming more and more transient. This is a sign of a mature inflation targeting regime. So we have to wait a while until we are sure that even if shocks occur, they will not disrupt progress towards the 4% target.
With input costs rising as shown by the WPI, can we expect core inflation to pick up soon?
There is no exact correspondence between WPI (wholesale price index) and core CPI (consumer price index). Although WPI increased very strongly, core CPI did not increase much over the past year. Many other factors influence the base CPI, and some of them contribute to a decrease in the base CPI. Corporate profit margins are at a healthy level. They don’t need to raise prices.
What supply-side measures do we need to avoid frequent spikes in food prices? We need to diversify our key crops by using our varieties across geographies, shorter crop cycles, more efficient agricultural supply chains, more retail chains should seek Direct sourcing from farmers as an alternative to mandis, better food processing, better preservation and better utilization of imports for smooth availability of supplies.
As we enter a general election year, do you expect volatility in the stock or bond markets? Market volatility is unlikely, especially as recent national election results reinforce expectations of stable election results. Greater diversity among market participants reduced volatility in Indian equity markets last year, despite big swings in foreign equity flows. Next year, more debt inflows are expected, but the market now has enough depth and scale to absorb them. The absolute amount is higher today as a percentage of GDP than the lower amount previously.
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