Reserve Bank of India Monetary Policy Committee member Saugata Bhattacharya flagged vulnerabilities in India’s external balance amid tighter global financial conditions, saying the interest-rate differential between India and G7 economies mattered for attracting debt capital flows.
In his statement in the minutes of the MPC’s October 5-7 meeting, Bhattacharya said global financial conditions had tightened significantly since the August review, with energy prices rising again and benchmark bond yields increasing across several G20 economies.
He noted that higher term premia demanded by investors were partly contributing to the rise in global yields, adding to the challenges facing emerging market economies.
“India’s external balance, however, remains a concern. The balance of payments shows some vulnerabilities, particularly given the tight global financial environment,” Bhattacharya said.
“At the very least, maintaining a certain gap between India and G7 interest rates is important for attracting debt capital flows,” he added.Bhattacharya, however, cautioned that monetary policy adjustments involved trade-offs. While a sufficiently high interest-rate differential could help attract debt flows, adjusting rates too rapidly could constrain domestic growth and, in turn, growth-led capital flows.Bhattacharya, however, cautioned that monetary policy adjustments involved trade-offs. While a sufficiently high interest-rate differential could help attract debt flows, adjusting rates too rapidly could constrain domestic growth and, in turn, growth-led capital flows.
Domestically, Bhattacharya said evidence increasingly suggested that price pressures were becoming more entrenched. Input prices, as recorded in wholesale price indices, had been printing close to 9 percent year-on-year, while media reports and enterprise surveys indicated that businesses were passing on higher costs to consumers.
He also argued that resilient economic activity and broad-based credit growth gave the RBI room to focus more closely on persistent inflation.
“Might the broad monetary policy environment in India now be too accommodative? Inflation risks and financial markets suggest it is,” he said.
Bhattacharya said current and forecast real interest rates did not appear consistent with levels required to ensure price stability. He therefore saw a strong economic case for tightening monetary policy to bring inflation closer to target and anchor expectations.
At the same time, he said domestic financial conditions had already tightened significantly, reducing the need for large domestic monetary policy actions.
“A data dependent approach is best to deal with the broad range of possible outcomes in this uncertain economic environment,” he said.
Bhattacharya voted to raise the repo rate by 25 basis points to 5.50 percent and supported changing the policy stance from neutral to calibrated tightening. The MPC unanimously approved the rate increase, while two members, Nagesh Kumar and Ram Singh, preferred to retain the neutral stance.
