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From left to right: Ashima Goyal, India's representative to IMF Surjit Bhalla, economist Bibek Debroy, former finance secretary Ratan P. Watal and PMEAC's former member Rathin Roy. File photo: PTI (PTI)
From left to right: Ashima Goyal, India's representative to IMF Surjit Bhalla, economist Bibek Debroy, former finance secretary Ratan P. Watal and PMEAC's former member Rathin Roy. File photo: PTI (PTI)

RBI MPC member Goyal favoured holding interest rates steady at this shadow meet

  • Goyal’s views, dovish on interest rates, are well-known. At a 23 September meeting on the ‘shadow MPC’ of Delhi-based economic think-tank EGROW, Goyal had called for a ‘pause’ on interest rates

NEW DELHI: Ashima Goyal was last week nominated to the Reserve Bank of India’s Monetary Policy Committee. Goyal is a distinguished macro economist and was a member of RBI’s technical advisory committee that used to advise the Governor on policy matters before the MPC came into existence in 2016.

She has been a professor of economics at Mumbai’s prestigious Indira Gandhi Institute of Development Research. She was also a member of the Prime Minister’s Economic Advisory Council, a key advisory body to the PM on economic matters, a post she quit subsequent to her nomination to the MPC.

Goyal’s views, dovish on interest rates, are well-known. At a 23 September meeting on the ‘shadow MPC’ of EGROW (Foundation for Economic Growth and Welfare), Goyal had called for a ‘pause’ on interest rates. Going by her recommendation at the shadow MPC, she is likely to favour keeping the repo rate at 4%. The shadow meet also figured Arvind Virmani, India's former chief economic advisor at the time of the 2008 global financial crisis.

EGROW, founded by Charan Singh, non-executive chairman of Punjab & Sind Bank and former RBI chair of economics at IIM Bangalore, is a Delhi-based economic research body and think-tank.

Below is Goyal’s statement at the shadow meet.

“The divergence between CPI and WPI inflation continues with CPI inflation still above the RBI’s target band. That CPI food inflation exceeds WPI food inflation suggests it is temporary due to disruption of retail supply chains. Heavy rains have also contributed to raising food prices. The low increase in minimum support prices and flat rural wages imply there will be no second round effects, and headline is expected to revert to a core that will be low because of soft demand.

It is important to continue anchoring inflation expectations, so a pause is called for at present. But clear communication is required that the inflation spike is temporary, and will be looked through, that the RBI will remain accommodative— as long as it takes for growth to revert to potential—which is likely to be longer since the virus has turned out to be persistent. The US Fed has given such an assurance for 3 years. Although details may be difficult to give now because of extreme uncertainty if the direction is made clear, industry and markets will respond now.

Since fiscal borrowing and spending will have to step up, a similar assurance of support for government spending should be given. Special Covid-19 bonds can be announced to make clear that such support is limited to the current special situation. Other measures should continue to be taken to reduce interest rate spreads. For example TLTRO could be made conditional on reducing loan rates, and tiered reverse repo support for banks conditional on passing through in deposit rates. The ECB has tried this ‘dual interest rate policy’.

Excess capital flows due to QE when there is a current account surplus, add to liquidity, expand the RBI’s balance sheet and make it difficult for it to support government borrowing. In the literature it is acknowledged that emerging markets need some kind of market-based capital flow management and macro-prudential measures as well as more exchange rate flexibility to manage this quadrilemma."

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