India’s central bank won’t consider interest rate cuts unless inflation settles firmly around the 4% target, with policymakers not even discussing the topic yet, Governor Shaktikanta Das said.
While price gains have moderated, “unless we see clear evidence that inflation is going to sustain at that level, it will be premature to talk about rate cuts,” Das told Bloomberg Television’s Haslinda Amin in an interview on the sidelines of the World Economic Forum in Davos Thursday. “The topic of rate cuts is not even under discussion,” he said.
The Reserve Bank of India has kept rates unchanged for five straight policy meetings, while sticking to a relatively hawkish stance as inflation hovers above the target. Economists are projecting the central bank will begin cutting interest rates this year after the Federal Reserve starts easing.
The RBI expects inflation to average around 4.5% in the fiscal year that starts in April, Das said. While that may be cause for caution, the governor said he “would not like to give any kind of forward guidance” on the timing of a rate cut.
When asked about the Fed’s policy easing, Das said markets “all over are running ahead of central banks and that should not happen.” He said rate cuts in India will depend on domestic factors, and reiterated the RBI’s policy is to be “actively disinflationary.”
“So far as India is concerned, the Reserve Bank and the markets, I think the thought process and the outlook, as far as I can see, is well aligned,” Das said.
Financial markets were relatively subdued Friday after Das’s comments, with the yield on the benchmark 10-year government bond rising 1 basis point to 7.19%. The rupee was steady at 83.15 per dollar as of 10:10 a.m. local time.
Madhavi Arora, lead economist for Emkay Global Financial Services Ltd., said the governor’s comments were to be expected in a global environment of rates remaining higher for longer.
“We are unlikely to see RBI precede the Fed in this rate cut cycle,” she said.
Inflation in India accelerated to a four-month high in December, largely due to volatile food prices. Stripping out food and fuel costs, the core measure slid below 4% for the first time in almost four years, raising expectations of rate cuts.
Economic growth will likely touch 7% in the next fiscal year, Das said, repeating comments he made in a speech Wednesday. That would put the economy on track to post growth of around 7% or more for four consecutive years, he said.
Faster expansion over the years suggests that India’s potential growth rate — an estimate of how fast an economy can grow at without triggering a spike in inflation — has also increased, Das said after the interview. The RBI had previously estimated that India’s potential growth was 6.5%, but that’s likely risen to around 7%, he said.
“The actual economic activity is higher than the potential growth rate” previously estimated by the RBI, he said. “And therefore, the growth potential also is rising. It is rising, perhaps, moving towards 7% or so.”
Emkay Global’s Arora said most of the improvement in the trend growth was driven by fiscal measures to improve the supply of goods and services in the economy, which is usually non-inflationary.
“The dividends of past reforms and the relatively better macro out-turn after hitting pre-Covid lows may have improved the macro landscape and growth potential,” she said.
IMF Backlash
Das also pushed back against the International Monetary Fund labeling the central bank’s currency intervention as excessive.
“We intervene in the market only to prevent excessive volatility, and we have not deviated from that policy. I think the IMF is missing out the nuances of our policy,” he said. The economy’s strong fundamentals have fueled inflows, which have underpinned the currency’s moves, he said.
“When this is the ground situation, when you have such a confluence of factors, if the rupee is holding, it’s holding on it’s strength and you cannot blame the RBI,” Das said.
An expected surge in foreign inflows after India’s inclusion in the JPMorgan Chase & Co.’s global index this year won’t change the central bank’s intervention strategy either, Das said, since the economy is large enough to be able to absorb the flows.
“The inflow is also going to be very steady. It’s not as if, you know, there’ll be a sudden spurt of inflow coming overnight, or in a few days,” he said.
