India Rate Hawk Sees RBI Credibility Restored After Hikes

(Bloomberg) -- A hawkish member of India’s rate setting panel who warned months ago that the central bank’s credibility was at risk now sees stabilizing bond yields as a signal that trust had been restored after a series of rate hikes.

“I draw comfort from the fact that during the recent spike in inflation, survey data indicated that inflation expectation remain well anchored and long term yields were quite stable,” Jayanth Rama Varma, an external member of the monetary policy committee, said when asked about central bank’s credibility. He responded in an e-mail reply to questions on Saturday.

Indeed, there are promising signs that the Reserve Bank of India’s actions are gaining traction. At its most recent survey, the RBI said households expect inflation to moderate. Retail inflation also softened for a third straight month in July even as it stayed above the central bank’s 6% target ceiling. RBI has increased the policy rate by a total of 140 basis points this year, including two back-to-back half point hikes.

“I believe that credibility should be measured by the perceptions and actions of households, businesses and market participants,” said Varma, who in March warned that the central bank’s inflation-targeting credibility is at risk by keeping the policy loose even as inflation had been exceeding the 2%-6% goal since the start of the year.

Varma, who advocated for faster and larger rate increases to rein in inflation, said that even if the RBI had increased rates by 75 basis points earlier this month, that should not be accompanied by a pause.

“If the MPC is convinced that a rate hike of a certain magnitude is needed, it should deliver that as quickly as possible rather than dribble it out in tiny doses,” Varma said, adding that frontloaded rate hikes should continue to guide policy in future meetings as well. 

Here are some more excerpts from the interview:

• “I am cautiously optimistic about growth,” he said. There are some signs of gradual, though uneven, revival of consumption demand, and “a modest likelihood” of private capital expenditure. However, global economic outlook remains “far from benign”
• “I see a soft landing as a trajectory of policy rates that minimizes the growth sacrifice,” he said
• “I would certainly like to see more robust growth in a lower inflation environment,” Varma said, adding that there is no room for complacency at the current stage
• “It is a truism that monetary policy does its job of inflation targeting by working primarily on the demand side, but that is not a reason for monetary policy to shirk its responsibility”

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