India’s retail inflation, as measured by the Consumer Price Index (CPI), will likely moderate to 4% by H1FY25 from 5.02% in September, external monetary policy committee (MPC) member of the Reserve Bank of India (RBI), Ashima Goyal told Piyush Shukla in an interview.
India’s retail inflation, as measured by the Consumer Price Index (CPI), will likely moderate to 4% by H1FY25 from 5.02% in September, external monetary policy committee (MPC) member of the Reserve Bank of India (RBI), Ashima Goyal told Piyush Shukla in an interview. Goyal says the moderation may happen even sooner than H1FY25 if there are no more major supply side shocks in the economy. Edited excerpts:
Household financial liabilities rose from 3.8% of GDP in FY22 to 5.8% in FY23. What is your outlook in FY24?
Households are sensitive to price signals.
Low interest rates and high inflation favoured the acquisition of physical assets such as housing. About 50% of household loans are for acquiring assets. As households borrow, financial liabilities rise. The household sector in India also includes unorganised industry that may be borrowing to invest. Investments will multiply future income streams.
But since interest rates have risen, but not by too much, there will be some switch from financial liabilities to financial savings, thereby helping to moderate any excessive rise in liabilities. They seem to have peaked in Q3FY23. Indian household leverage is low compared to other emerging markets and needs to rise, but it is better this happens in a gradual sustainable way.
Household net savings hit a 47-year low, dropping to 5.1% of GDP in FY23 from 7.2% previous year. How concerning is this data?
Household savings are the sum of household financial and physical savings, and this remains in double digits since physical savings are a larger share. As explained above, household physical savings rose, financed partly by rising household liabilities so that net financial savings dropped to 5.1%. There are reasons, such as higher real interest rates, why this trend is expected to moderate. Borrowings that finance investment will multiply future income and savings.
CPI inflation eased to 5.02% in September. Where do you see the CPI panning out in H2FY24 and FY25?
At present, forecasts are for inflation to moderate and reach 4% by HIFY25. But shocks have interrupted such forecasts in the past. If there are no major supply shocks it may be faster since core inflation is softening.
When will the RBI MPC pivot towards rate cuts?
When headline inflation is seen to sustainably approach the 4% target. There are signs it is doing so, but since past such approaches have been interrupted by supply shocks, it is necessary to wait and watch for some time. Recent past shocks have had only a temporary effect suggesting inflation expectations are getting anchored.
Liquidity remains tight post I-CRR measure. Will borrowing cost rise more for small and mid-sized lenders?
They (RBI) have reversed the I-CRR cuts. Under inflation targeting, liquidity adjusts to keep call money rates in the liquidity adjustment facility around the repo rate. The RBI has to ensure this. So there is no reason for NBFC borrowing costs to rise further since the repo rate is not changed.
Banks are increasingly focusing on personal loan book growth. Do you see this strategy as potentially risky?
Not if lending is done with proper underwriting, and against salary (cash) flows or collateral.
Source:indianexpress.com