Inflation likely to fall below 6% next year amid RBI`es rate hike efforts: Ashima Goyal
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Highlighting the Reserve Bank of India’s (RBI’s) efforts to contain price rise by repeatedly increasing interest rates, RBI Monetary Policy Committee (MPC) member Ashima Goyal has said that this will help in containing inflation, which is likely to fall below 6 per cent next year. She further said that the policy rate hikes have largely reversed pandemic-time cuts but the real rate remains low enough not to hurt the growth recovery. She added that with a lag of two-three quarters, higher real rates will reduce demand in the economy. She noted that ‘International commodity prices are softening with the global slowdown and supply chain bottlenecks have reduced’.
In order to control rising inflation, the RBI on September 30, raised the short-term lending rate for the third consecutive time by 50 bps to take the repo rate to 5.9 per cent. Since May it has cumulatively increased the key interest rate by 190 basis points. Goyal said ‘The Indian government is also taking action to reduce supply-side inflation. Current projections show inflation falling below 6 per cent next year’. The central bank is mandated to keep inflation at 4 per cent with a 2 per cent margin on either side. According to Goyal, a mildly positive real interest rate can act to reduce inflation, with supportive supply-side action, while imposing minimal growth sacrifice.
She noted that currently the forward-looking real interest rate is positive and such a rapid response in an inflation targeting regime to inflation exceeding tolerance bands, helps anchor inflation expectations. On the Indian rupee touching a historic low, she pointed out that a more depreciated rupee makes imports more expensive and hurts those who have borrowed abroad but may raise returns for some exporters. While observing that lower imports and higher exports can help reduce the current account deficit, she said the dollar is strengthening against all currencies as rising Fed rates attract funds back to the US. She pointed out that corporates have reduced debt over the last decade and the financial sector is well-capitalized. He noted that ‘All this lowers contagion risk for India’.
