Durable, high GDP growth requires inflation to be under control but real interest rates above 2% may not be sustainable when it comes to supporting the growth needs of the Indian economy, Shashanka Bhide, a member of the Monetary Policy Committee, said to ET in an interview.
If one goes by the MPC’s projection of 4.5% average inflation in FY25, the prevailing policy repo rate of 6.5% translates into a real interest rate of 2%.
Edited excerpts:
In your view, what is an appropriate level of real interest rate that pushes inflation back to target while ensuring that growth is supported?
With policy rate as the instrument, there is a trade-off in terms of growth while bringing down inflation rate to the target. But moderate inflation rate is also needed to achieve sustained high growth. While real interest rates above 2% may not be sustainable from a growth perspective, persistence of inflation above the target is also unacceptable in the present framework.
In the latest MPC minutes, you have stressed upon the need for revival of growth in consumption demand. From a policymaking perspective, how can conducive conditions be created for improved employment and household income conditions?
There are clearly signs of strong investment demand including construction activity, reflecting conducive environment for new investment. Sustaining this environment would be a key to achieve the multiplier effects of new employment and income. Moderating inflation rate is also needed to spur consumption spending.
By when do you think a deceleration in food inflation would bring the headline inflation back to target on a sustained basis?
The present high levels of food inflation reflect supply-demand imbalances essentially driven by unfavourable production conditions. There have been policy interventions to minimise these imbalances, especially from the short-term perspective. The longer-term strategies would be needed to reduce the volatility on the supply side. From the monetary policy perspective, it is important that the food inflation pressures do not lead to spill overs or generalisation.
Do the concerted policy steps taken since last year provide the MPC with comfort to now look past sporadic instances of food price increases?
There is greater coordination of economic policies in addressing the inflation challenges, particularly by improving the supply response not just in production but also the logistics. This certainly reduces the potential for sharp rise and persistence of such price pressures.
India’s GDP growth has surpassed expectations over the past year and remained resilient. Given the continuing geopolitical volatility, are there risks to the sustainability of domestic growth?
Continued geopolitical conflicts are a significant risk to the economy, especially because of the implications to energy and key inputs in terms of access and prices. But from a broader perspective, sustained growth would also require quick revival of global economic growth and trade as well.
