Global Leadership Summit 2024: Piyush Goyal on India’s road to a developed economy | Watch
India’s consumer price index hit a 14-month high in October, led primarily by a sharp spike in the price of food and vegetables, limiting the likelihood of an interest rate cut to near zero.
Goyal, like Chief Economic Advisor V Anantha Nageswaran, believes high interest rates won’t help in bringing food prices down. “Food inflation has nothing to do with managing inflation. It’s time that policy makers and monetary policy authorities should sit together and decide if food inflation needs to be part of calculating headline inflation. There should be a serious thought on this,” Goyal told CNBC-TV18 at the Global Leadership Summit in Mumbai on November 14.
However, RBI governor Shaktikanta Das has repeatedly resisted the proposition. In his view, people’s inflation expectations are anchored in food prices, which have an inordinately high impact on household budgets.
In theory, interest rate cuts contribute to overall price rise. In his speech at the Global Leadership Summit, hosted by CNBC-TV18, minutes after the comments made by Goyal, RBI Governor invoked a quote from one of his earlier speeches: ‘financial stability is a public good. We do not wait for the house to catch fire; prudence is our guiding philosophy’.
“During the pandemic, we prioritised growth and infused a lot of liquidity… We shifted our focus to inflation later,” Das said in his speech today.
“What is equally important that all these actions didn’t undermine growth or financial stability… It is evident that while designing our policies in response to the pandemic and the inflation surge thereafter, our policies were dynamic,” he added.
The debate assumes significance in the context of the shrinking consumption in India, especially in lower income households, has shrunk in recent months due to rising inflation. However, it’s not a new debate.
A few weeks ago, RBI Governor Das lauded the flexible inflation targeting framework, which was introduced during Raghuram Rajan’s tenure at the central bank, as one of the six fundamental reforms that transformed India.
Also Read | Explained: What is inflation targeting and how does it help an economy?
“This reform formalised a clear inflation target, giving the RBI a mandate to keep inflation within the 2-6% range (currently at 4%). The creation of the Monetary Policy Committee (MPC) was instrumental in balancing inflation control with growth, especially during periods of global economic stress. In 2023, inflation averaged 5.4%, remaining within the target range, a testament to the framework’s effectiveness,” Das said then.
He credits the absence of runaway inflation in India to the policy framework set in 2016.
In the government’s pursuit for faster growth, the RBI Governor is likely to face more pressure to cut interest rates. Will he relent or stand his ground?
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