© Reuters. FILE PHOTO: Customers buy fruits and vegetables at an open-air evening market in Ahmedabad, India, August 21, 2023. REUTERS/Amit Dave/File Photo

By Ira Dugal and Swati Bhat

MUMBAI (Reuters) – India’s Monetary Policy Committee (MPC) decision to strengthen its 4% retail inflation target follows inflation returning to its comfort zone of 2% to 6%, but does not necessarily mean interest rates will remain higher for longer, two outside members of the committee told Reuters.

India’s inflation exceeded the rate board’s upper tolerance limit of 6% in five of the last 12 months, but remained between 4% and 6% in the other seven months, including a decline to 5% in September after two months of food cost-related spikes.

“A few quarters ago, the urgent task before the MPC was to keep inflation within the tolerance band. That phase is now behind us, barring a few temporary spikes above the band,” panel member Jayanth Varma told Reuters by email late on Friday.

“The focus therefore naturally shifts to the next stage, which is bringing inflation to the target level,” Varma said, adding that there was no ambiguity regarding the ultimate inflation target of 4%.

The six-member rate-setting panel, which includes three outside members, left interest rates unchanged this month but signaled it would focus on a 4% inflation target, raising expectations that interest rates will rise in Asia’s third largest Economy could remain elevated for a while.

However, this focus does not necessarily mean interest rates will stay higher for longer as decisions will be data dependent, panel member Ashima Goyal told Reuters by email.

“So far, core inflation is falling to 4% despite repeated supply shocks.”

Varma said a real interest rate – derived by adjusting the key rate to inflation – of around 1% will sustainably reduce inflation to the target.

“If projected inflation falls, the nominal repo rate, which is the real interest rate of 1%, will also fall,” Varma said.

“Everything therefore depends on how the inflation forecast for three to four quarters develops in the coming quarters.”

The MPC’s “patience to allow inflation to slide towards the target” was “primarily due to concerns about the fragility of growth,” Varma said.


Data released by the central bank last month showed that net financial savings of Indian households fell to a 50-year low of 5.1% of GDP as debt levels rose.

In the minutes of the MPC meeting, Goyal suggested that measures such as higher capital requirements for fast-growing credit categories be considered “to curb excessive enthusiasm in good times and thereby prevent a crash.”

Household debt in India is relatively low and does not need to rise “too quickly,” Goyal told Reuters.

“A countercyclical supervisory policy supports financial stability and therefore growth, while allowing the interest rate to adjust to domestic inflation and growth needs.”

Varma said in the MPC minutes that households’ willingness to take on debt could support consumption and growth in the near term.

“I think the job for policymakers is to make sure that economic growth is robust enough so that these loans can be repaid from rising incomes,” Varma told Reuters.

“If there is no growth, this debt would of course become a burden in a few years.”

Source : www.investing.com

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