Inflation fight, monsoon may take pressure off RBI: Former deputy governor

The govt's recent $26-bn fiscal package, which includes tax cuts and subsidies, as well as the RBI's rate increase earlier this month, should be able to cool inflation to 6%, says R Gandhi

India’s coordinated fiscal and monetary efforts to tame inflation, plus a good agricultural production outlook, may take pressure off the central bank to aggressively raise interest rates later in the year, according to a former Reserve Bank of India official.

Interest rate increases by the RBI “should be very moderate” after an expected 50 basis point rise at its next meeting in June, Rama Subramaniam Gandhi, who was a deputy governor from 2014 to 2017, said in a Bloomberg Television interview on Monday. 

The government’s recent $26 billion fiscal package, which includes tax cuts and subsidies, as well as the RBI’s rate increase earlier this month, should be able to cool inflation to 6%, which is the top end of the central bank’s target range, he said. Gandhi also expects that a forecast normal monsoon rainfall could bring food prices “well under control.”

India’s central bank is struggling to contain surging prices as war and supply chain disruptions pushed retail inflation to the highest in eight years, and producer price inflation to over a three-decade high. The RBI governor, Shaktikanta Das, signaled last week that a rate hike is coming at the next meeting in an interview. 

Gandhi sees the RBI likely raising the benchmark repurchase rate by an additional 25 basis points during the current fiscal year through March, depending on inflation. That would take the rate higher by a cumulative 75 basis points to 5.15%, its pre-pandemic level. 

The former deputy governor’s rate expectations compares with a forecast for peak interest rate of 6% in the current cycle by economists such as Pranjul Bhandari from HSBC Holdings Plc. and Samiran Chakraborty Citigroup Inc.