After the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), kept key interest rates unchanged at 6.25 percent for the fourth successive policy review, Chief Economic Advisor Arvind Subramanian has expressed his sadness over the RBI’s inflexibility on interest rates. He said that deceleration in growth and falling inflation warranted a substantial monetary policy easing.
Subramanian has stated that he respected the decision taken by the RBI, which is in the broader good of the country. However, he said “I wanted to give you my own technical assessment of the inflation and growth outlook”. He also said that there is a plausible alternative macroeconomic assessment as real policy rates are tight and rising at a time of low inflation and slowing growth. He added that off course, the appreciating real exchange rate makes the real monetary policy conditions even tighter.
CEA further said that not just headline inflation has been running well below target and so far in advance but core inflation has also declined sharply. He pointed to the wide divergence between the MPC’s inflation outlook and the actual inflation level, which is well within RBI’s comfort zone of 2-6%. He noted that Inflation forecast errors by the RBI have been large and systematically one-sided in overstating inflation. He added that the outlook also points to a slowdown and not to a rapid acceleration.