It is important to bring the consumer price index (CPI) inflation to 4 per cent on a durable basis, if India wants to achieve a high sustainable growth, says Shashanka Bhide, external member of the Reserve Bank of India’s (RBI) Monetary Policy Committee.
In an exclusive interview with Outlook Business, he said, “In the context of a sustained high growth objective, achieving the inflation target is important.”
The MPC, in its meeting on June 7, voted with 4-2 majority to keep the repo-rate unchanged at 6.5 per cent, for the eighth-consecutive time. Bhide, who voted for a pause, said keeping the policy focus on achieving the inflation target on a durable basis is appropriate at this juncture, in the minutes of the meeting.
Edited Excerpts:
After eight straight policy reviews, there is still a majority for to keep the repo-rate unchanged, within the panel. Are the members of view that rate cuts will not support growth significantly when there is weak demand and consumption, and therefore, focusing on inflation?
My own view has been that given the gradual decline in the headline inflation, it is necessary to bring it closer to the target in a durable way. The projections we have show that while the first half of this year will see a decline, the second half points to the upside pressures. Growth has been significant and inflation rate aligned with the target will also support growth momentum, particularly consumption.
Do you believe there is a need for demand side measures to spur private investments and facilitate a more inclusive growth? Can consumption be boosted right now, without straining the fiscal deficit?
Steady growth rate we have seen in the recent two years, provide both employment and income push to demand. At this point, maintaining moderate inflation rate would be important to spur consumption demand. Private investment has the benefit of the infrastructure developments in the recent years. That is a major factor that drives not only infrastructure related sectors but a more general push to all the sectors. We have also seen double digit growth in bank credit and steady capacity utilisation rates. These factors, along with the stable macroeconomic conditions, including fiscal consolidation are supporting investment. The weak point has been external demand.
What is your overall assessment of the impact of the potential rate hikes on India's growth trajectory? Will they be sufficient to lead to the actual growth potential?
We should be looking at achieving sustained high growth and pushing the growth potential. Policy rates would contribute to maintaining a stable and supportive macro environment. We have now seen a decline in inflation rate although there were many disruptions in this process. There were significant adverse external and weather related shocks.
How important is the target of bringing CPI inflation to 4 per cent on a durable basis? An argument says India is currently sacrificing growth to achieve this target.
In the context of a sustained high growth objective, achieving the inflation target is important. As I have mentioned, moderate inflation rate would help push consumption demand and growth. Consideration of growth-inflation trade-off is very important, but a credible moderate inflation path is also necessary for investment and consumption.
