Inflation will gradually glide towards 4% target, but this would take several quarters
- Restrictive monetary policy controls inflation by suppressing demand, and until companies see robust demand growth, they may be reluctant to invest despite reasonably high capacity utilisation
Highlights:
- Jayanth R Varma, an external member of the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC), expects inflation to trend downwards in the coming quarters.
- However, he cautions that this process will take several quarters and may see transient spikes, particularly due to food inflation. He emphasized that the 4% inflation target is a statutory mandate and remains sacrosanct for the MPC.
- Exclusion of Food Inflation from CPI Varma refrained from commenting directly on the proposal to exclude food inflation from the Consumer Price Index (CPI), noting that the MPC's role is to adhere to the government-set target.
- He suggested that any changes to the inflation target should be decided by the government, not the MPC.
- Interest Rate Policy Varma advocates for a reduction in the repo rate, citing the need to boost private capital investment. He voted for a 25 basis point cut during the August meeting and believes further cuts should be considered based on inflation and growth outcomes in the coming months.
- He also expressed confidence that India has enough monetary autonomy to set its policies independently, even if the US Federal Reserve were to cut interest rates.
- Growth Projections While acknowledging the difficulty in forecasting growth with precision, Varma predicts that India's GDP growth for FY 2024-25 and FY 2025-26 will be around 7%, which he considers below the economy's potential growth rate.
- He believes achieving growth closer to 8% will require a combination of digitalization, tax reforms, infrastructure investment, and lower real interest rates to stimulate private sector capital investment.
- Private Investment and Demand Uncertainty Varma attributes the sluggish private capital investment to demand uncertainty caused by restrictive monetary policy.
- He argues that while high capacity utilization exists, companies may hesitate to invest without clear signs of robust demand growth. He suggests that reducing the current high real interest rates could help revive private investment.
Prelims Takeaways:
- CPI