CEA Arvind Subramanian disagrees with RBI status quo on interest rates
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New Delhi: Chief economic adviser in the finance ministry Arvind Subramanian on Wednesday disagreed with the Reserve Bank of India’s (RBI) decision to keep interest rates unchanged and suggested softening inflation and slowing economic growth warranted a “substantial monetary policy easing”.
Subramanian’s bold statement signals the rising tension between the finance ministry and RBI over the need to cut policy rates to facilitate a quick turnaround in economic growth after its sharp deceleration in the fourth quarter of the past fiscal, partly on account of the currency crunch resulting from the high value currency ban of 8 November.
In a note, Subramanian said while he respected RBI’s decision of maintaining repo rate—the rate at which RBI infuses liquidity in the banking system—at 6.25%, there was what he called a “plausible alternative macroeconomic assessment”. As per this, inflation has been well below the central bank’s target, while economic growth is decelerating.
“In recent times, seldom have economic conditions and the outlook warranted substantial monetary policy easing,” said Subramanian. The chief economic advisor said as per his alternative macroeconomic view, not only headline inflation, which includes food and energy prices that are prone to sudden sharp spikes, but also core inflation has declined sharply. Consumer price inflation had dropped to a new record low of 2.99% in April from a nearly five-month high of 3.89% in March.
“Inflation forecast errors have been large and systematically one sided in overstating inflation. In this (alternative) view, the inflation outlook has been rendered benign by an appreciating exchange rate, a good monsoon and a capping of oil prices by structural shifts,” he said.
Growth has decelerated from July, Subramanian said, citing several economic indicators including real gross value added (GVA), industrial output, capital formation and capacity utilization in the industry.
Real GVA, a measure of economic activity that excludes net indirect taxes from GDP, slowed to a growth pace of 5.6% in the March quarter, its fourth consecutive quarterly decline, according to data released by Central Statistical Office on 31 May.
“Even personal loan growth that proxies for consumption has recently been decelerating,” said Subramanian.
Inflation was under control and is likely to remain so due to good monsoon, while no spike in oil prices was likely, news agency PTI reported on 5 June, quoting finance minister Arun Jaitley from an interview given to a television channel. The minister further said that economic growth and investments needed to improve.
D.K. Joshi, chief economist at rating agency Crisil Ltd, said consumer price index based inflation is likely to remain at an average of 4% in 2017-18.