Amid low inflation, CEA sees no impact on RBI policy as Fed turns hawkish

Monetary policy will not have to be in conflict with fiscal policy in India, as opposed to other economies, says K V Subramanian

A possible tightening of monetary policy by the Federal Reserve may not prompt the Reserve Bank of India to follow suit as inflationary pressures are contained for now, a top government adviser said.

Federal Reserve Chair Jerome Powell paved the way for quicker-than-expected U.S. hikes, which could ripple through rate-sensitive emerging market assets. He told Congress that policymakers will discuss whether to wrap up bond purchases a few months earlier and retired the word “transitory” from his commentary on inflation.

“Monetary policy will not have to be in conflict with fiscal policy in India, as opposed to other economies where monetary policy will have to unwind the demand push that has been given by fiscal policy,” K V Subramanian, chief economic adviser in the Finance Ministry, said in an interview to Juliette Saly and Rishaad Salamat on Bloomberg TV. “We are keeping inflation low.”

His comments come a week before the central bank’s monetary policy committee meets. The panel is expected to leave the record low interest rates unchanged as inflation remains within its target range, while the economy faces new risks from the omicron variant after expanding 8.4% in the three months through September. The central bank maintains that most of the inflationary pressures are due to supply-side issues while demand in the economy is still muted.

Subramanian expects India to grow in double digits this year and dismissed concerns of any slowdown due to the new variant. He also said Prime Minister Narendra Modi’s administration would continue with reforms and remains on the path of fiscal consolidation.

The South Asian nation might overshoot its budget deficit target of 6.8% of GDP this year as the government boosts spending and struggles to complete planned asset sales, according to people with knowledge of the matter.

“Even though there may be some decline in non-tax revenues, specially the privatization receipts, tax revenues will more than make up for it,” Subramanian said. “The target that we have announced will be met.”