Whalesbook
RBI Deputy Governor Poonam Gupta explained that India's economy has the capacity for growth beyond 7.5% without igniting inflation. She noted recent data supports this, showing growth alongside inflation under 4%. This is underpinned by the economy's robust balance of payments, driven by steady remittances, strong services exports, and consistent Foreign Direct Investment (FDI) inflows. These factors act as solid supports against global economic turbulence.
Stronger Balance of Payments
Gupta emphasized the balance of payments' strength comes from lasting structural factors, not just temporary trends. Pillars such as remittances, net services exports, and FDI inflows are expected to handle global economic shocks. While portfolio flows recently dipped, she stated other parts of the balance of payments absorbed this without issue.
Monetary Policy Working Effectively
Gupta also addressed questions about how effectively the central bank's interest rate changes reach the wider economy. She presented data showing the current process is as effective, or even more so, than previous periods when rates were lowered. While short-term rates responded almost perfectly and medium-term rates well, longer-term rates are more influenced by global trends and inflation outlooks, which are outside the RBI's direct control.
Improving Inflation Measurement
Looking forward, Gupta suggested reviewing how often the basket of goods and services used to measure inflation is updated. Currently updated every 12 years, she proposed more frequent reviews, possibly every three to five years. This could sharpen the inflation control strategy, particularly as consumer habits change and the impact of volatile items like food on overall inflation decreases.
Public Views on Inflation Target
Gupta also shared findings from public responses to RBI discussion papers on the inflation framework. The majority of respondents favored keeping headline CPI as the inflation target, supported a 4% inflation rate, and agreed with the existing +/- 2% tolerance band.