6.5% is below our potential or desirable rate of growth: Ashima Goyal

High real interest rates for a longer period can hurt economic growth as it happened during 2015, says Ashima Goyal, member, Monetary Policy Committee, in an email interview with Manojit Saha.

In the minutes, you have stressed on the point that the real repo rate does not rise too high as inflation expectation falls. What according to you should be the real repo rate, given that January-March inflation is projected at 5.1 per cent?

The real repo rate is still in an acceptable band around one. If we get a sequence of inflation forecasts below 5 per cent, the real repo rate would approach 2 per cent. This is too high with the current global growth slowdown and other vulnerabilities. Given these, a real repo rate of around 1 per cent is adequate to bring inflation down to target, as supply shocks unwind.

Can higher real rates, for a longer period, hurt economic growth?

Yes. This happened after 2015, when inflation fell with oil prices but the nominal repo rate was not reduced adequately. Since the investment cycle is reviving in India after many years, it needs to be protected.

You have said consumption and exports have areas of softness, pent-up demand for services may moderate, and unemployment remains high. In this context, do you think the FY24 growth projection of 6.5 per cent is optimistic?

No, but 6.5 per cent is below our potential or desirable rate of growth required to increase employment.

Even if there are monsoon-related uncertainties, do you believe the interest rate cycle has peaked?

The next few months are critical. If they show a sustained reduction in core inflation, then there would be no need to raise repo rates. Monsoon-related spikes, if any, should be transient.

You have also said, citing research that the inflation targeting regime has contributed to reducing inflation expectations while adding “it does not require the nominal repo to be kept higher for longer.” Does this mean you would like to see the repo rate start to come down sooner than later? Is it possible that the repo rate will start declining in the current financial year as some analysts have suggested?

Monetary policy affects inflation in two ways. First, it anchors inflation expectations. For this to work, the inflation targeting regime has to be credible. For credibility, the nominal repo rate has to rise or fall with the expected inflation rate, so that the real rate is at an appropriate level. Second, the real repo rate affects aggregate demand. For this also, the real rate has to be at the correct level. So, statements about the nominal repo alone are inadequate. Since the aggregate demand channel works with a lag, nominal rates have to be seen in the context of expected inflation. If the latter falls sustainably below 5 per cent, the nominal repo rate also needs to come down. It depends on how data over the next few months affects forecasts.