The joint moves come as inflation in Asia’s third-largest economy hits its highest level in eight years, topping the central bank’s target in the past four months, and as markets test capacity policy makers to smooth currency movements and control borrowing costs. .
“We have entered another phase of coordinated action between fiscal and monetary authorities to control inflation,” Reserve Bank of India Governor Shaktikanta Das said in an interview on Monday, adding that the measures would have a “sobering impact” on consumer prices.
India joins policymakers around the world struggling to slow a spike in consumer prices that threatens their recovery from the pandemic and risks tipping economies into recession.
Das said the central bank would raise interest rates at its “next” meetings, following a surprise hike earlier this month that ended two years of growth-friendly cheap credit support to deal with the pandemic.
His comments come days after Prime Minister Narendra Modi’s government announced fiscal measures, including tax and fuel price cuts, which are expected to cost $26 billion and lead to higher government borrowing.
Higher rate expectations are “a given,” Das said in Monday’s interview, adding that policymakers are aiming to eliminate “excess” liquidity. He also said that the RBI will not allow a “rampant” depreciation of the rupee.
The currency has seen a series of record lows in recent weeks amid investment outflows of more than $20 billion this year. After Das’ speech, the rupee recouped earlier losses to trade down 0.1% to 77.595 to the dollar.
Borrowing costs have risen as inflation takes off
As economists see the new budget plan widening the deficit – Barclays Plc expects it to hit 6.9% of gross domestic product – Das said he expects the government to stick to its target by 6.4%. Bond yields briefly fell after his comments.
“My feeling is that the government remains committed to maintaining the fiscal deficit target stated in the budget,” Das said. “I can’t speak on behalf of the government, but having worked in the finance ministry, there is no direct correlation” between spending and borrowing needs, he said.
While the cuts and grants could dampen headline inflation and ease pressure on the central bank, they may not be enough to divert the RBI from its course of monetary tightening, the economists wrote in reports on Sunday and Monday.
Other points raised by Das in the interview include:
*The central bank will revise, at its next meeting in June, its inflation forecast of 5.7% for the current fiscal year to March
*The RBI remains committed to ensuring non-disruptive public borrowing. “We will use various political instruments”
*“We are going to move towards positive real interest rates”, without proving a timetable. Ashima Goyal, an external member of the rate-setting panel, argued last week for early hikes to prevent real rates from turning too negative.
*Cryptocurrencies will “seriously” undermine monetary and fiscal stability