High interest rates were not impacting economic growth, said Reserve Bank Governor Shaktikanta Das on Tuesday. Future monetary policy would "unambiguously" focus on bringing down inflation.
The Governor further told an event organized by the Bombay Chamber of Commerce and Industry that the country is standing at the threshold of a structural shift in its growth trajectory and can easily sustain an 8 per cent real GDP growth once that happens annually.
Provided growth is well maintained, he said, “Normally if growth is well sustained, if you’ve good growth, then it is a clear sign that your monetary policy and your interest rates are not acting as an impediment to growth."
There had been concern ever since the interest rates touched the eight-year high that it could be at the cost of growth. She dismissed such apprehensions saying growth momentum was continuing month after month.
The nowcasting team within the RBI has estimated GDP growth at 7.4% in the June quarter, a shade higher than its central bank's forecast of 7.3%. Das expects the economy to reach its house estimate of 7.2% in FY25.
"A good growth outlook gives us the necessary space to unambiguously focus on inflation," he added.
Das used an analogy with a chess game to plead that the battle for the moderation of inflation should be a cautious one; one misstep would take away all the growth in progress. Any weather event could send inflation back above 5 percent, he pointed out, cautioning vigilance.
He attributed the fall in inflation from 7.8 per cent in 2022 to the present 4.7 per cent—a reduction of 3.1 percentage points—to monetary policy actions.
He said that he noticed a link between lower inflation and growth, stating that the rate of inflation can be linked to sustainable growth. According to him, high inflation reduces economic competitiveness, scares both domestic and foreign investments, and reduces the purchasing power of people, especially the poor.
Das said that after three years of government expenditure-driven growth, there is now "clear evidence" of a comeback of private capital expenditure, especially in the infrastructure-related sectors such as cement and steel.
This goes against some suggestions that the former RBI Governor Raghuram Rajan had made for a services-led growth, according to Das. Pitching for a multi-sectoral approach for achieving long-term growth, he said large economies like India cannot depend only on either manufacturing or services.
In comments that came a day after the RBI appointed an additional director to the board of Bandhan Bank, which is going through a leadership transition, Das said the banking and non-bank sectors are healthy and India's financial stability metrics have improved.
He also pointed at GST, the bankruptcy code and flexible inflation targeting as some of the big-ticket structural reforms undertaken in the past few years that have worked well for India.
