Fed might raise rates, but RBI would be guided by own considerations: CEA

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The Reserve Bank of India (RBI) would not tighten its monetary policy if the US Federal Reserve (Fed) raises rates further, chief economic advisor (CEA) V Anantha Nageswaran said on November 2. Though the US central bank did not raise interest rates against expectations in several quarters, chairman of the Fed, Jerome Powell, has said that they could hike rates again if the war against inflation warranted it. While attending the Barclays Asia Forum in Singapore, CEA Nageswaran told Bloomberg Television, “If the Fed were to hike 25 basis points, or even two times, that will not put pressure on the RBI to follow suit.” Nageswaran argued that the RBI’s interest rate cycle was not so closely linked to that of the US central bank that it needs to follow all the footsteps of Fed. He claimed that the country’s external balances and financial stability were better than they were about a decade ago. “The Indian rupee among Asian currencies this year has been the most stable, And given the macro fundamentals, I think the RBI does have a few degrees of freedom than before… India’s financial variables, both interest rates and exchange rates, have been remarkably stable,” he said. RBI governor Shaktikanta Das recently said at a BFSI Insight Summit organised by the Business Standard that domestic factors determine India’s monetary policy. “We look at all possible international factors because we are living in a globalised world. We will be impacted by what’s happening all around us. But ultimately and eventually, our monetary policy is primarily determined by domestic factors. Our monetary policy is not influenced by the differential in bond yields (with the US Fed) or if the currency is depreciating, but by inflation-growth dynamics and its future outlook,” he added. Incidentally, in October, the RBI Monetary Policy Committee (MPC) retained the repo rate at 6.5%. It was the fourth successive time that the key rate was left unchanged. Between May 2022 and February 2023, RBI raised the repo rate by 250 basis points. The sole objective was to rein in inflation by tightening money supply in the economy. Nageswaran also tried to cool concerns arising out of the rising crude oil prices. He remarked that India was well within the margins of safety. RBI forecasts are based on a crude oil price of $85 per barrel in the second half of FY24. Nageswaran commented that he is hopeful that in this decade India’s growth would be marked by capital formation. Pointing out a risk for the India economy, the CEA said that it would include a significant price correction in the global stock markets. The US especially would might have a spillover effect on many other countries including India. “If geopolitical developments worsened considerably and oil prices shoot up well above $100-$105 (per barrel), the speed and the magnitude will matter for India,” he admitted. The CEA also remarked that he did not think the country would settle for a loose fiscal policy simply because of the impending general elections. “The fiscal deficit is 40% of the annual estimate, which is very well on track to achieve the 5.9% (fiscal deficit target) which we have in place for the Union government,” remarked Nageswaran.