New Delhi: India’s central bank should be flexible and consider the fall in wholesale prices while reviewing interest rates as inflation pressures subside, the finance ministry’s top economic adviser said.
“Inflationary pressures are significantly down," Arvind Subramanian said in an interview on Wednesday when asked if there was room for monetary easing.
Subramanian called the divergence between wholesale price inflation and consumer-price inflation—the central bank’s benchmark—a “puzzle" that should factor into monetary policy. Prime Minister Narendra Modi’s administration and the central bank agreed to target consumer-price inflation earlier this year.
“When you have flexible inflation targeting, that flexibility is exactly what you need to exploit in conducting monetary policy," Subramanian said. “Under this existing thing there is enough flexibility to take these unusual circumstances in account, but whether to formalize it in some way is something we have to think about."
Reserve Bank of India governor Raghuram Rajan rebuffed calls from the finance ministry last month to cut one of Asia’s highest borrowing costs. Twenty-six of 32 economists in a Bloomberg survey expect him to cut the benchmark rate to 7% on 29 September, with five expecting a hold and one predicting a 50 basis-point reduction.
Wholesale price inflation has been contracting since November last year. Consumer-price growth eased to 3.66% in August, below the central bank’s target of 6% by January for 12 straight months.
Even so, Rajan said that CPI figure was “excessively low" due to base effects. He’s looking to bring consumer-price inflation down to an average of 4% in the coming years.
In an interview on Monday, finance minister Arun Jaitley reiterated the need for lower interest rates and said sectors including real estate, manufacturing and infrastructure were anxiously waiting for the central bank to ease monetary policy.
Modi’s government has moved India in the right direction even though expectations of big bang economic reforms were misplaced, Subramanian said. India’s $2.1 trillion economy is on course to expand between 8 and 8.5% in the year through March even though there are some downside risks, he said.
That would make India the world’s fastest growing major economy with China slowing down.
Modi has seen opposition lawmakers block key proposals like a goods-and-services tax, raising concerns among investors. The benchmark S&P BSE Sensex index has lost 6.7% this year after a 30% gain in 2014. The rupee has lost more than 4% against the dollar this year. Bloomberg