India rate-setter says core inflation must ease towards 4%

A DOVE-turned-hawk in India’s monetary policy committee said demand in the economy was leading to significant price gains and high-interest rates are required to keep a lid over inflation, including the core measure.

“Core inflation is a significant component of headline inflation. Unless this is brought close to the overall target rate of 4 per cent, it would be hard to achieve and maintain the target,” Shashanka Bhide, an external member in the Monetary Policy Committee of the Reserve Bank of India (RBI) said in an interview.

Core inflation has stayed above 6 per cent for 16 months in a row last month, offering little respite to policymakers who have raised interest rates by 250 basis points since May last year to keep headline prices between 2-6 per cent range. Consumer prices accelerated sharply to a three-month high of 6.52 per cent in January.

“High core inflation also points to the cost-price nexus in the economy more sharply,” Bhide said, adding that stabilising core prices was necessary for manufacturing firms to expand their capacities.

Bhide’s comments highlight the core inflation level policymakers are perhaps targeting as the RBI grapples to tame prices. The struggle has been complicated by prospects of a global slowdown hitting home as well as tighter financial conditions.

The RBI’s rate panel on Feb 8 voted 4-2 to raise the benchmark repurchase rate by 25 basis points to 6.50 per cent to cool retail inflation that has stayed above target through most part of last year. Bhide voted in favour of a hike, while other external members in the panel Jayanth Rama Varma and Ashima Goyal opposed an increase, fearing risks to a recovery, minutes showed.

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Amid sticky prices, Bhide said winning the battle against inflation would be the best outcome for the economy. “The rate increase needed to moderate inflation expectations may have a short-term adverse impact on growth, but would improve growth in a more sustained way.”

Bhide’s comments come as expectations of another rate hike gather steam, with economists from Goldman Sachs and Citigroup forecasting a quarter-point move in the monetary policy review due Apr 6.

Here are other key comments from Bhide:

• “Reduction in expected rate of inflation, quarter- ahead or a year-ahead is likely to indicate revival of demand in a non-inflationary way”
• “The external macro environment impacts our economy in terms of aggregate demand, inflation and investments. Monetary policy will need to take into account this interdependence”
• Bhide said “even limited success” achieved jointly by the Group of 20 nations in ironing out severe disruptions to global trade and investment caused by the Russia-Ukraine war, “will have a positive impact on inflation”. BLOOMBERG