Earlier this month, the central bank’s rate-setting panel, the Monetary Policy Committee (MPC), surprised the market with an increase of 40 basis points in the repo rate at an off-cycle policy meeting. This was the first rate increase since August 2018, in the spree of inflation.
Subbarao also said that while monetary policy works with a gap, the rate hike is unlikely to bring down inflation in a hurry.
“I see that the hasty move to tighten the financial situation through an off-cycle MPC meeting has raised a number of questions,” he told PTI in an interview.
Subbarao also asked why the RBI did not raise interest rates much earlier despite rising inflation.
“Was the RBI asleep despite rising inflation? Has it gone overboard in prioritizing growth over inflation? Won’t the delayed measures cost too much in macroeconomic terms? Will this shake up the credibility of the RBI?”
“I believe this criticism is unfair,” he said.
Retail inflation rose to an eight-year high of 7.79 percent in April this year, and inflation plunged for the seventh month in a row. The RBI has been made mandatory by the government to keep inflation at 4 per cent with a margin of 2 per cent on both sides.
Noting that the RBI, like other central banks in the world, had to deal with surprising uncertainties due to rapid geopolitical developments, Subbarao said in early April that when the last scheduled MPC meeting took place, war was raging in Ukraine. For weeks, however, even seasoned military experts and experienced diplomats were wrong to predict its course.
“It is unreasonable to expect central banks to predict the future more accurately,” Subbarao said.
The former RBI governor noted that the direction of inflation will depend on the pace of the next few cycles and the amount of policy.
“Currently credit growth is only around 9-10 per cent, the recent repo rate hike is unlikely to pass very strongly,” he said. Not uncovered
In response to a question, if inflation is above the RBI’s target band, the central bank may have to explain why it is unable to bring it down, he said, adding that the RBI may face that possibility by September.
“If this unpleasant situation arises, the RBI must see it as an opportunity to explain the policy navigation challenges at a time of great uncertainty,” Subbarao suggested.
According to its inflation targeting mandate, if the average inflation for three consecutive quarters is above the target band, the RBI has been asked to write a letter to the government explaining the reasons for the failure to deliver inflation within the target band and the remedial measures taken to achieve it. Back to the goal
Citing some economists talking about the risk of stagflation, he said that India was moving towards stagnation – a terrible combination of high inflation, rising unemployment and low growth – exaggerated.
“For an economy to grow close to 7 percent in the medium term, any fear of stagnation is misdirected,” he said, adding that unlike most of the world’s major economies which are demand-limited, India is structurally limited in supply and this huge demand potential is a stumbling block for India. Safety valve.
Asked if rising interest rates would hurt growth, he said India had seen early signs of a revival of private spending and private investment over the past few months.
“These growth trends will hurt momentum due to rate movements, and some compromises on that amount increase are inevitable. But only in the short term. In the medium term, price stability contributes to sustainable growth,” he argued.
Regarding the rupee’s all-time low against the dollar in recent days, Subbarao said the RBI may feel somewhat comfortable in devaluing the rupee to bring real effective exchange rate (REER) to parity and keep India’s exports competitive.
On the other hand, he noted that devaluation of the rupee increases inflationary pressures by increasing the cost of importing rupee.
“In my view, we should be ignorant of the exchange rate level and engineer the exchange rate path to prevent unreasonable volatility,” he said.