Low inflation will improve investment climate

Thoughts on several sovereign-related developments in India. Straight talk by Thomas Rookmaaker, Director, Asia-Pacific Sovereigns Group, Fitch Rating

fitch ratings

  1. Dr. Urjit Patel taking over as the next governor of central bank.
  • As a rating agency, we look at actual policies rather than personalities. The fact that Dr. Patel has served as deputy governor in the past three years, suggests continuation of the current policy direction in the years ahead. Dr. Patel was part of the team at RBI that set in motion significant policy changes to deal with both high inflation and weak bank balance sheets, including through the set-up of new policy frameworks. Dr. Patel seems well-positioned to further institutionalize these policy changes in the period ahead.
  1. The RBI’s response in fighting inflation
  • The inflation target range is rather broad, in the sense that 2% seems quite low and 6% quite high for an emerging economy like India. But it seems to make sense to have a rather broad range around the 4% mid-point, as food and oil price movements can have a large impact on headline inflation. The MPC would theoretically target the range around the mid-point and not one of the outer points specifically, but it is too early to tell if inflation will in practice be skewed to one side of the range.
  • Structurally low inflation would positively impact the sovereign rating profile as it would improve the investment climate and, hence, contribute to sustainable growth.
  1. Differences between the RBI and the Federal Government on monetary policy
  • Differences of opinion between governments and central banks on what needs to be done, for instance when it comes to monetary policy, are actually rather common. But the question is too what extent the central bank is actually pressured to follow the government’s line. The inflation targeting framework now in place, should reduce the impact of such pressures, but it will be interesting to see how this will play out in the Monetary Policy Committee, in which members appointed by both the government and RBI will have a vote on monetary policy.

 

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