Supply steps for food will allow policy to be less restrictive: MPC external member Shashanka Bhide

If the food inflation stays high and persistent, then the monetary policy focus on moderating the headline CPI rate would affect “mainly the non-food inflation, particularly the core,” said Shashanka Bhide, external member, Monetary Policy Committee (MPC). In an interview with Priyansh Verma, Bhide mentioned that supply interventions in the food sector will allow monetary policy to be “less restrictive”. On the possibility of the rate cut in next calendar year, Bhide said that if the recent inflation rate trajectory is sustained, “the real interest rate considerations would be appropriate”, for rate change, even as he denied giving any specific timeline. Excerpts:

Q. An RBI paper said India’s natural rate of interest has risen to 1.4-1.9%. Do you agree with this assessment?

The range appears plausible. 

Q. If that’s the case, then can we expect the first rate cut only during the next calendar year?

Outlook for both growth and inflation would be the major considerations for the policy rates. I do not have specific timing for the rate changes but if the recent inflation rate trajectory is sustained, the real interest rate considerations would be appropriate.    

Q. Many economists expect GDP growth to be below 7% in FY25. In fact, Q1 growth could be 6.7% (vs RBI’s 7.1% estimate). Is the RBI being too optimistic?

The projected growth rate of 7.2% for 2024-25 is 1 percentage point lower than the latest estimate for 2023-24. Some of the expectations surveys have suggested H2 performance would be better than H1. But the risks to the outlook remain.   

Q. What should be the ideal scenario for the rate to be cut? Inflation is easing, and growth is slowing down…

Easing inflation outlook in a credible way and growth momentum holding form the ideal scenario.  

Q. You say “persistent food inflation may require core inflation to soften sufficiently”, but core inflation is expected to only rise going forward. What do you mean by “soften sufficiently”?

Given the inflation target, if the food inflation runs high and persistent, then monetary policy focus on moderating the headline would affect mainly the non-food inflation, particularly the core. Other supply interventions in the food sector will allow monetary policy to be less restrictive. In general, credible policy would help anchor inflation expectations close to the target.  

Q. One member within the MPC says, inflation may have already reached 4%, but we don’t see it due to outdated CPI series. Should that aspect not be considered by the MPC, while deciding policy?

Updated CPI is quite important. But it may be difficult to use a separate measure for monetary policy as the headline measure would be seen by many as the current inflation rate and affect inflation expectations.