RBI Should Pause, Think About Decoupling from US Fed: SBI’s Soumya Kanti Ghosh

The RBI should “pause and think” if it can continue mirroring the US Federal Reserve “stroke by stroke” in terms of rate hikes or decouple from the American central bank, SBI group chief economic adviser Soumya Kanti Ghosh said.

Ghosh said he does not see an end to the rate hike cycle of the Fed in the short term, which makes a case for the RBI to contemplate about decoupling.

“My point is can we match the Fed stroke by stroke? At some point of time we need to pause and think whether the impact of the earlier rate hikes (by the RBI) has percolated down into the system… I don’t see any end to the Fed’s cycle soon, it could be three or more rate hikes going ahead,” Ghosh said.

He was speaking at a session organised by the Bharat Chamber of Commerce here. In January 2023, the country’s inflation jumped up to 6.52 per cent, above the RBI’s tolerance level of 6 per cent. This came after inflation remaining above 6 per cent for 10 out of 12 months in 2022.

Most economists believe that the RBI will hike rates to soften inflation, which in recent times has been spurred by food prices. The US Federal Reserve has also been raising rates and has actually been more aggressive than the RBI, raising policy rates by 4.5 per cent since March 1 last year.

“If you look into the 2008 cycle, you will see that central banks raised rates in unison but when they cut rates, they did so based on country-specific factors… The RBI needs to think if we can decouple from the Fed or see if we are keeping pace with them,” Ghosh told PTI on the sidelines of the event.

He said the RBI has raised interest rates by 250 basis points since May 2020, and this cycle is still underway. The repo rate at present stands at 6.50 per cent.

“We need to ensure there is an end to this rate hike cycle and that should be data-dependent, otherwise at some point of time, this could hurt India’s economic recovery,” the senior SBI official said.

On speculations of a possible global recession and its impact on India, Ghosh said there have been talks of a slowdown of exports in such a situation, but a recent SBI report suggests otherwise. He said the study took into account 19 export commodities, and of these, 14 were found to be “macro-agnostic” (agnostic to the global business cycle).

“This indicates that even if global growth declines, exports will not significantly decline… one of the reasons for that is agriculture exports have picked up, which is usually not sensitive to global factors,” Ghosh said.

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