'Too high real repo rate could have adverse effects on demand, supply'

Repo rate cannot affect food prices. So, keeping it above equilibrium will not lead to faster disinflation. A positive real repo rate is adequate to anchor inflation expectations, says Ashima Goyal

Ashima Goyal, emeritus professor, Indira Gandhi Institute of Development Research, and an external member of the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) voted in favour of a 25 basis points (bps) cut in repo rate in the June policy meeting against the majority view of status quo. Goyal indicates a growth sacrifice of 1 percentage point – FY25 GDP growth is projected at 7.2 per cent compared to 8.2 per cent in FY24 – if the repo rate is kept unchanged for the next six months, in an email interview to Manojit Saha.

In the April policy, you voted to keep the policy rate unchanged. In the June policy, you favoured a rate cut. What has changed between the April and June policy?

In the April policy, oil prices were rising and there was uncertainty related to the monsoon, impact of heat waves and elections. I was waiting to see their impact. Some of these are resolved. The approach to the inflation target has not been upset. The heat wave has had less than expected impact on food prices. If we wait longer, the real repo rate will be higher than necessary for too long.

The main argument for maintaining the status quo is high food prices, and the uncertainty around it. There is concern of spill over effects of higher food prices. Why do you think high and stubborn food prices will not impact headline inflation?

Recurrent food price shocks have not been able to disrupt the convergence to target over the past year. They are unlikely to do so in the future.
 

Slow progress of the last mile of disinflation seems a worry for some members. What is your view?

The repo rate cannot affect food prices. So, keeping it above equilibrium will not lead to faster disinflation. A positive real repo rate is adequate to anchor inflation expectations. A too high real repo rate can have adverse effects on demand as well as supply. The real repo rate is very high in terms of core inflation.

You said in the minutes that growth is below potential. What is the potential growth rate in your view?

If inflation continues to fall and expected inflation is approaching the target with growth at 8 per cent, it means we can safely grow at such rates.

What could be growth sacrifice in FY25 in your view if the repo rate is kept unchanged for another six months — till the end of 2024?

We are seeing that growth estimates for FY25 are below growth in FY24. This gives an estimate of the current growth sacrifice.

Do you think high interest rates could put pressure on asset quality of banks and non-banking financial companies (NBFCs), particularly unsecured loans?

Such interest rates will hurt highly leveraged borrowers. But since lending is now risk-based, loans are small in size and prudential or preventive regulation has tightened. So, there is unlikely to be much pressure on asset quality of banks and NBFCs. Unsecured retail loans are normally covered by cash flows and salaries.