RBI to hold rate on Friday, future hike will depend on inflation data: Gita Gopinath
Mumbai, June 3
The Reserve Bank of India is likely to keep interest rates unchanged in the near term and adopt a data-dependent approach before taking any future policy action, according to Gita Gopinath, former Deputy Managing Director of the International Monetary Fund.
In an exclusive interview with ANI ahead of the RBI's monetary policy announcement, Gopinath on Wednesday said the central bank is currently balancing inflation risks arising from higher oil prices and currency depreciation against signs of softer economic activity.
"I expect that in the near term the RBI will likely be on hold, but then eventually maybe in the future depending upon developments and what's happening with inflation, they can respond," she said.
According to Gopinath, a data-dependent approach remains the most appropriate course of action under the current circumstances.
Commenting on the rupee, Gopinath said the RBI has handled the currency well amid the ongoing disruptions caused by developments in the Strait of Hormuz and the broader West Asia crisis.
She said it is natural for the currency to adjust when there are significant changes in the international economic environment.
"RBI has handled this very well. They have let the rupee adjust, which it should do because we have a change in the international environment," she said.
According to Gopinath, the developments in the Strait of Hormuz have economic consequences and some depreciation of the rupee should be expected as part of the adjustment process.
At the same time, she supported the RBI's intervention in the foreign exchange market to address disorderly market conditions.
She noted that such interventions are appropriate as long as they are aimed at maintaining orderly market functioning rather than preventing any movement in the currency.
"I think what you should avoid against is doing an intervention that keeps the currency from simply not moving at all," she said.
Gopinath cautioned that excessive intervention could discourage foreign investors from bringing capital into the country if they believe the currency will weaken sharply once intervention stops.
She added that allowing the currency to find its appropriate level while intervening only to smooth excessive volatility is the right approach.
"So I think that the way it's being handled right now is appropriate," Gopinath said.
She also noted that while there is some inflationary pressure due to higher oil prices, consumer price inflation has not increased significantly because the pass-through of higher crude prices to retail fuel prices has so far remained limited.
"There's been some increase but not that much," she said while referring to fuel prices at the pump.
At the same time, she pointed out that economic activity has shown some signs of softening, which also needs to be considered while making monetary policy decisions.
"And so therefore, maybe waiting for more data to see what's happening to inflation, what's happening to economic activity before raising rates would probably is one approach to take," Gopinath said.
Her comments come as markets closely watch the RBI's policy decision for signals on interest rates, inflation management and the central bank's assessment of the impact of higher oil prices and global uncertainties on the Indian economy.
— ANI
Reader Comments
Data-dependent approach is the way to go. RBI has handled rupee fluctuations well, no doubt. But I'm worried about the economic slowdown she mentioned - if they hold rates too long, inflation might spike later. Tough balancing act for the central bank.
I wish she had addressed why fuel prices at the pump haven't come down even when global crude drops, but when crude rises, prices shoot up immediately. That pass-through logic doesn't work the same way for us consumers 😤
Good to see an economist who actually understands the ground reality. Gopinath's point about not intervening excessively to prevent currency movement is spot on - artificial stability never works long-term. Let the rupee find its natural level, just smooth out the panic swings.
All this talk about data dependency is fine, but who is tracking the data of middle-class families struggling with EMIs and rising grocery bills? The RBI needs to think beyond just inflation numbers and consider the cost of living for aam aadmi. Just saying. 🤷♂️
I appreciate Gopinath's balanced perspective. She's right that RBI should avoid excessive intervention. But I'm concerned about her comment on 'softening economic activity' - if growth is slowing, maybe they should consider a rate cut instead of just holding? Let's hope the Governor listens to diverse views before Friday.
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