(Bloomberg) -- India’s central bank needs to “unambiguously” focus on inflation as economic growth remains strong, Governor Shaktikanta Das said, adding to expectations interest rates will be kept on hold for longer.
The Reserve Bank of India monitors the growth numbers very carefully and even with current interest rates, economic activity has been very robust, Das said at an event hosted by the Financial Express newspaper in Mumbai on Friday. The central bank is “optimistic” of its 7.2% growth projection for the current financial year that started in April.
The RBI has kept its benchmark rate unchanged at 6.5% for more than a year now, with Das consistently saying he’s not ready to consider rate cuts with inflation still above the 4% target. Even so, there are growing calls for rate cuts from within the RBI’s Monetary Policy Committee, with two of the six members voting for a reduction last month. A third MPC member said in an interview that high real interest rates aren’t conducive for growth.
“Stable inflation at 4% will be the biggest contributor to our GDP,” Das said Friday. He said the central bank is keeping a close eye on inflation, which accelerated to a four-month high of 5.08% in June, largely because of higher food and vegetable prices.
Das also responded to a question about India’s neutral or natural rate of interest after a paper by an RBI staffer estimated the range for the rate had increased to 1.4%-1.9% from 0.8%-1.0% during the pandemic. The neutral rate refers to the interest rate at which an economy can grow at full capacity without fueling inflation pressure.
Citigroup Inc. economists said in a report Thursday that since the RBI’s benchmark rate is within the estimated neutral range, policymakers are in no hurry to ease policy.
Das said Friday that the RBI’s target is inflation, not the neutral rate of interest, which is subject to much uncertainty. “The neutral rate is a theoretical concept and cannot determine monetary policy,” he added.
On the banking sector, the governor said India’s financial system remains stable and healthy. “The problem of bad loans is well contained, but we have to remain there,” he said.
The RBI’s latest Financial Stability Report showed a drop in the bad-loan ratio to 2.8% of total loans at the end of March 2024 compared with 3.9% the previous year. The RBI expects the ratio to fall further to 2.5% by March 2025.
Das also said the central bank continues to be wary of allowing industrial houses to run banks, saying it is difficult to prevent related party transactions.
“India doesn’t need proliferation of banks, but sound and well governed banks,” he said.
Other key highlights from his speech:
- Non transparency in pricing and high rate of interest by microfinance institutions may prompt regulatory action from the RBI
- Credit growth should not run ahead of deposit growth by miles
- RBI working with law enforcement agencies to strengthen transaction monitoring system of banks
- Delinquency levels in small ticket loans warrants enhanced vigil
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