No reason for RBI to hold back 25-bp cut over developments in US: Gita Gopinath

Gita Gopinath
The elevation of Urjit Patel as Reserve Bank of India (RBI) governor was thought to represent policy continuity at RBI. But, in the very first monetary policy committee, all six members voted to cut interest rates. Further, the real interest rate target was also lowered to 1.25 per cent, from the 1.5 to two per cent range set by previous RBI Governor Raghuram Rajan. To understand the change in RBI’s thinking on inflation and interest rates, Ishan Bakshi spoke to Gita Gopinath, professor of economics at Harvard University, at the India Economic Summit. Edited excerpts. 

There was this view that the elevation of Urjit Patel as RBI governor represented policy continuity. But, there has been a policy departure in his first monetary policy review itself. Your views?

I would like to wait for another round of the monetary policy committee meeting before I pass judgement on whether this is a discreet shift or not. I did think the policies of Urjit Patel would be closer to those of the previous governors but, that said, I don’t want to pass judgement.

Might it not have been prudent for RBI to wait for the US Federal Reserve to raise rates, look at its fallout on emerging markets and then decide on interest rates?

I don’t think one needs to worry so much about holding back on a 25-basis point rate cut in expectation of what will happen in the US. But, in the long run, we will have to see how the US Fed moves. Everything right now points to a slow increase in interest rates in the US. Though that could change. But, I would not say that this (rate cut) is premature. My expectation is that as things evolve, RBI will pay attention to not only domestic events but global events as well.

There are rumours of creating a bad bank to deal with non-performing assets. Wouldn’t that lead to problems of moral hazard?

Creating a bad bank would be consistent with practices around the world. The problem with banks is that you have bad assets and banks are unwilling to lend, as their balance sheet is in a bad state. At the same time, it has to be done properly. We have to make sure we are not back in the same situation again. There has to be proper regulatory oversight of this process.

In its first meeting, the newly constituted monetary policy committee has lowered the real interest rates target from 1.5-2 per cent to 1.25 per cent. What caused this change?

I would like to wait for the minutes of the monetary policy committee to see their thinking. But, it is true; globally there has been a declining trend in real interest rates.

This is tied to lower productivity growth and huge demand for safe assets. That has brought down real interest rates. But, I am not sure all those factors apply equally to India, which is why I am curious to see the specific arguments made by the committee members.

In large part, India’s macroeconomic stability in recent years is largely because of the decline in oil prices and fall in gold imports. Is there any reason to worry that a sudden uptick could reverse the gains made?

That is certainly an important source of concern. India has definitely benefited in terms of macro stabilisation, with a fall in commodity prices. But, there is no expectation that commodity prices will go back up to what they were in the past. While there might be an increase, it might not happen very soon, given the projections of global growth. When it does happen, it would certainly make it harder to meet inflation targets in India.

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