scorecardresearchMonetary Policy Committee member Shashanka Bhide Eyes Larger Interest Rate Hikes to Return Inflation to Goal

Monetary Policy Committee member Shashanka Bhide Eyes Larger Interest Rate Hikes to Return Inflation to Goal

Updated: 11 Jul 2022, 03:46 PM IST
TL;DR.
India’s central bank may need to raise interest rates more aggressively to anchor inflation within its 2%-6% target, according to Shashanka Bhide, a member of the rate-setting panel.
FILE PHOTO: A man walks behind the Reserve Bank of India (RBI) logo inside its headquarters in Mumbai, India, April 8, 2022. REUTERS/Francis Mascarenhas

FILE PHOTO: A man walks behind the Reserve Bank of India (RBI) logo inside its headquarters in Mumbai, India, April 8, 2022. REUTERS/Francis Mascarenhas

(Bloomberg) -- India’s central bank may need to raise interest rates more aggressively to anchor inflation within its 2%-6% target, according to Shashanka Bhide, a member of the rate-setting panel.

The weak rupee, which has slumped 6% this year, is keeping India’s import bill high despite the drop in global commodity prices, Bhide, an external member of the Reserve Bank of India’s Monetary Policy Committee, said in an e-mail reply to questions on Friday.

“Larger initial hikes are needed given the persistence of the supply constraints,” Bhide said. “In commodities where we are significantly dependent on imports, the pass-through of lower prices could have been quicker but for the significant depreciation of the rupee in the recent period,” Bhide said.

Bhide’s comments came as Governor Shaktikanta Das said that inflation is expected to cool from October, suggesting that there may be less need for aggressive monetary action. A recent slump in commodity prices, especially of cooking oils used to make many staple dishes in India, could offer relief.

RBI has raised its key rate by 90 basis points in two moves since May to 4.9% after inflation climbed to its fastest pace since 2014. While consumer price gains eased to 7% year-on-year in May from 7.8% in April, a weak local currency keeps imported inflation elevated.

 “The quantum of rate hikes need to be commensurate with the objective of bringing down the inflation rate” to target over the medium term, said Bhide. The MPC member on Monday said his Friday’s remarks still stand.

A positive real interest rate, Bhide said, would also “be appropriate to sustain incentives for savers.”

The rupee, which gained on Thursday after the central bank announced a raft of measures to boost foreign-exchange inflows, is down 0.2% against the dollar at 10:03excl a.m. local time on Monday.

Here are some more excerpts from the interview:

  • “It is necessary to improve the conditions on the supply side, make it more efficient so that higher output can be delivered without raising prices. Measures on the part of the government, fiscal or other, in this regard would be effective in protecting output and employment levels.”
  • “Higher interest rates now may lead to some reduction in demand,” but the “overall economic activity would be affected by adverse global factors as well and not just the domestic policy rates.”
  • “It is unlikely that falling commodity prices would provide room for higher indirect tax rates immediately. Some of the exemptions given for imports may go if the price fall is sustained.”

First Published: 11 Jul 2022, 03:46 PM IST