More interest rate hikes done than necessary: MPC's Jayanth Varma

 Ashima Goyal, a member of the Reserve Bank of India's monetary policy committee, said inflation could fall sharply to 4% if there were no supply-side shocks. Commenting on India's growth prospects for the current fiscal, Goyal said the country has been able to weather external shocks. Edited excerpts:

Some high-frequency data reveals growth slowing. Given this, do you think the MPC's 6.5% GDP forecast for FY24 looks over-optimistic?

The growth forecast is lower than the Central Statistics Office's second advance estimate of 7% for FY2023. Therefore, it takes into account the factors that reduce growth. However, the economy has shown resilience to external shocks, which are themselves less severe than expected. So, forecasting is possible. Estimated demand has come down through net imports. This is a factor contributing to the growth forecast now at 6.5%, up from 6.4% last time.

The overnight index swap market is eyeing a rate cut in the second half of the year. is it fair?

They would do well to pay more attention to the incoming data.

The minutes indicated that you are not in favor of further hike in interest rates. Are you indicating a long pause?

I am indicating that further rate action will depend on data on how inflation and growth realizations affect their future prices.

RBI's monetary policy report is projecting inflation to fall to 4% by the end of the next financial year. When do you expect inflation to median 4%?

If there are no more major supply shocks, it could fall sharply as there is no excess demand or tight labor market-driven second-round effects keep inflation high in India.

The market seems confused by the MPC's communication. A statistical base effect has been cited by the MPC for revising one-year inflation down by 40 bps leading to an increase in real rates. Given this, how is it justified to demand a rate freeze by the MPC?

Forecast revisions in April do not justify rate action. As growth has proved more resilient than expected, the MPC may now focus more on achieving the inflation target. But since large global and meteorological uncertainties that affect both expected inflation and growth remain, it is better to hold back and wait for more data as well as the lagged effects of past monetary policy actions. The downward revision in inflation is not solely due to base effects or measurement issues. The pace has also slowed down. Surveys indicate that companies are not putting past cost overruns due to lack of demand, and cost increases have also reversed.

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