You mentioned the OPEC output cut and uncertainties related to the monsoon as inflationary risks. If oil prices were to behave and the monsoon progress normally, what would be your outlook on interest rates?
In that situation, I would expect inflation to decline below 5.5% and the projections would be that it would fall even further. The real interest rate would then rise well above the 1% level that is perhaps needed to glide inflation towards the target of 4%. The MPC would then need to deliberate hard about the appropriateness of the growth sacrifice implicit in such a high real interest rate. Much would depend on how well economic growth holds up in this scenario.
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Over the past year, you have often dissented on rate actions. Do you feel rate hikes have been overdone?
There is a good chance that more has been done than is truly necessary. My own preference is for a wait and watch attitude that would avoid over shooting.
You have reiterated that the stance of the MPC’s policy is a confusing one. What is your recommendation when it comes to the stance?
I think the stance should be one of heightened alertness in the face of emerging inflationary risks.
You mention that at present the MPC does not have the luxury of responding to growth headwinds. How much of a growth slowdown could prompt a policy response?
Inflation or at least projected inflation would have to fall much closer to the target for the MPC to have the headroom to act against a growth slowdown.
As liquidity tightens going ahead, higher money market rates could add to tighter financial conditions. In your view, is there any scope for the RBI to infuse durable liquidity when it is still clearly battling inflation?
Liquidity management is outside the remit of the MPC partly because, under ideal conditions, liquidity is orthogonal to monetary policy per se. Providing liquidity at or above the repo rate does not in principle impede monetary transmission.