With inflation easing in India, will the RBI opt for a rate cut in the next MPC meet? Will global economic headwinds play spoil sport?
MPC member Shashanka Bhide shares his views.
MPC member Shashanka Bhide shares his views.
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00:00 The minutes of the MPC were published last week.
00:04 Dr. Shashanka Bheere had some interesting commentary on both inflation and growth trends.
00:10 Today, he joins us for a conversation delving a little bit deeper into all of these.
00:15 Sir, thank you so very much for taking time out.
00:18 Thank you.
00:20 So, you know, to begin with, in your commentary, you have highlighted some of the concerns
00:28 in growth and inflation.
00:30 And of course, taking all of these factors into consideration, the RBI forecasts inflation
00:37 to gradually decline to about 5.2 percent by the end of this fiscal.
00:42 So, what I want to ask you is, is this pace of decline comfortable for the MPC, considering
00:50 time and again, we have seen both external members as well as internal RBI members reaffirm
00:59 that the inflation target is 4 percent and not the range for plus or minus 2 percent?
01:07 Yes, I think the objective or the goal is the target rate of 4 percent and the deceleration
01:16 in the inflation rate while it is gradual, but it is also based on the expectations and
01:25 the projections of the growth also.
01:28 So, I think we are at a stage where the growth momentum has been sustained, but I think we
01:33 also have a lot of risks associated with both the trajectories.
01:37 So, in that sense, I think the gradual decline in inflation rate is something that is reasonable
01:43 at this time.
01:45 Absolutely.
01:46 So, you know, you have also mentioned about the uneven pace of economic growth we've seen,
01:52 also investment spending at this juncture rising at a faster pace than consumption.
01:58 Are these concerns to watch out for in a slightly longer time frame from a medium-term angle
02:05 as well?
02:07 So, I think at the moment we are looking at the shorter-term trajectories of growth and
02:15 inflation and on the next four quarters or so.
02:18 So, in that sense, the uneven trend is a concern because I think for sustainable growth we
02:26 require all components of the demand to grow in a significant way.
02:32 So, in that sense, I think the uneven trends are a concern, which is where I think the
02:38 changes are required.
02:40 So, as we have also noted, there is this weak global environment and we have also had a
02:50 somewhat erratic monsoon rainfall this year.
02:54 So, I think this also has led to these uneven trends.
02:59 Sure.
03:00 So, on the erratic monsoons, also the impact in the coming months of all of these trends
03:07 on inflation, do you now feel there is need for continuing supply-side interventions that
03:13 we have seen so far even by the government?
03:18 Yes, I think the spikes in inflation we saw in July and August this year, I think were
03:25 obviously because of specific items in the food basket.
03:30 But I think the overall concerns from the rainfall situation during this season, this
03:37 year, this season, I think has meant that we may have pressures in the food inflation
03:44 front.
03:45 And in that sense, the supply-side measures are more effective, I think, in addressing
03:50 this issue than other policies.
03:52 So, in this sense, I think the need for supply-side measures, whether it is improving the supply
03:56 chains or improving the availability of the items, this is where I think the supply-side
04:03 measures are more effective.
04:05 Sure.
04:06 Also, your colleagues have highlighted the impact of the data that we have seen from
04:13 the RBI on household savings, at least in the coming quarters, that is being seen more
04:20 as a positive, as it is expected to give some kind of a flip to demand and consumption trends.
04:26 Would that be your view as well on the decline we have seen, the modest decline in household
04:33 savings?
04:36 I think we should be concerned about the impact on consumption, I think, in these trends also.
04:48 Because I think the increased liabilities, financial liabilities, for example, if they
04:53 are for meeting consumption requirements, and I think if it is a short-term sort of
05:01 indicator, short-term phenomenon, then I think it is sustainable.
05:07 But I think given the trends that we have seen in consumption so far, it is necessary
05:11 that the consumption is backed by higher income rather than just increasing financial liabilities.
05:19 So I think in the short term also, they are a pointer to the need for increased income.
05:24 That is where I think the growth momentum is important.
05:29 Sure.
05:30 Okay.
05:31 So another concern on growth has been the commentary on rural trends so far.
05:37 The MTC appears to believe that rural demand is showing signs of recovery.
05:42 Aren't signs from the rural economy fairly mixed at this stage?
05:49 Yes, I think the indicators have been mixed for rural scenario.
05:57 So part of the reason, obviously, is the fact that we have not had a very favorable monsoon
06:05 this year.
06:06 So in that sense, I think the momentum for consumption in the rural sector would not
06:13 be so favorable.
06:14 But there are, I think, certain indicators where the rural consumption demand is picking
06:21 up.
06:22 Actually, I think it would be interesting to see the impact of the festival season on
06:26 consumption demand.
06:28 So I think in that sense, in the short term, if the better urban demand sort of stimulates
06:35 the rural demand as well, that would be a good sign.
06:39 But I think otherwise the rural demand is catching up.
06:42 But I think a lot of this improvement in consumption demand is in the sort of essential items of
06:51 consumption and so on.
06:54 We don't see the momentum in all sectors as far as the rural demand is concerned.
06:59 So you know, considering some of these factors that we have touched upon, would it be fair
07:04 to say that at this juncture, for both inflation as well as growth, risks are balancing towards
07:13 the downside?
07:17 As far as the growth is concerned, you know, the first quarter numbers that we have seen,
07:25 they suggest that there is a fairly good momentum as far as growth is concerned.
07:31 I think the sort of caution is in terms of the unevenness of this growth.
07:39 As we have seen, there has been growth in certain sectors like infrastructure and construction,
07:47 for example, significantly faster than the growth in the other sectors.
07:52 Services growth has been reasonably good, but manufacturing growth has just begun to
07:56 recover.
07:58 So I think as far as the growth is concerned, there are risks to the sort of sustaining
08:06 of the momentum.
08:07 But as far as inflation is concerned, I think at the moment, while the projections are for
08:13 this decline in the inflation rate towards the end of the financial year, the concerns,
08:19 I think, are from this geopolitical tensions and I think how well the post-monsoon weather
08:29 conditions hold for the next ruby crop.
08:32 So I think that is one of the reasons I think we would like to – I am in favour of waiting
08:40 for how these trends develop in the short term at this time.
08:48 Okay.
08:49 And how do you see the impact of higher US bond yields, higher crude prices and a stronger
08:56 dollar weighing on the Indian economy?
08:59 I think it's probably the global conditions in terms of the tight monetary conditions
09:08 that are there in advanced economies and so on.
09:13 And so these have an impact globally on the emerging economies, with respect to the capital
09:20 flows, with respect to the currency and so on.
09:22 So I think these are the risks that are there that need to be dealt with or that need to
09:29 be looked at.
09:31 So I think at the moment, the global conditions are sort of – they require more caution.
09:41 And I think what we have seen so far, the global concerns with respect to the geopolitical
09:46 tensions, so they also need to be watched at this time.
09:52 Sure.
09:54 So one last question before we let you go.
09:56 So the expectation at this juncture is that the MPC will hold rates for the foreseeable
10:03 future.
10:04 The question, however, is when the MPC will cut rates and if it should give a little more
10:12 clarity on that in its resolutions.
10:16 What are your views on that?
10:19 I think what is clear is that we should continue to make progress, I guess, in reaching the
10:27 target, inflation target that is the mandate of the committee.
10:33 So in that sense, I think the rate chain decisions, rate cut decisions, rate chain decisions,
10:38 I mean, they depend a lot on what the projections are in the short term, short term sense in
10:45 the next four quarters or so.
10:47 So I think getting to a sustainable rate of inflation, which is close to 4 percent, that
10:54 is the – that is what is required.
10:57 It's not so much of the timeline, I think, but it is the sustained reduction in the inflation
11:04 rate to the target level.
11:05 I mean, that is what is important as far as the policy is concerned.
11:10 All right.
11:12 Thank you so much for taking time out for this conversation.
11:15 This was most informative.
11:18 Thank you very much for the opportunity.
11:19 Thank you.
11:26 (END)
11:27 This is an uncorrected transcript.
11:27 For more information, please visit www.fema.gov.au or call 1-877-424-7483.