On fiscal deficit, Rangarajan was of the view that it could be 3.6% of GDP in FY20 and FY21.

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) may keep policy interest rates unchanged in the forthcoming policy review, former RBI governor C Rangarajan told FE. He said the recent spike in retail inflation is temporary and no re-calibration is needed in the inflation targeting framework of 4% plus/minus 2%. The next monetary policy review is scheduled to be held on February 6.

Retail (CPI) inflation climbed to 7.35% in December, its highest level since August 2014, much before the enactment of the inflation targeting framework in June 2016. Official data for December showed that consumer food price inflation rose to 14.1%, led by a 60.5% increase in vegetable prices and a 15% rise in the prices of pulses.

“This is just a sudden spike in inflation because of the extraordinary increase in the prices of some vegetables like onion and so on. Inflation will come down quite sharply to well below 6% in the next few months,” Rangarajan said. He noted that core inflation was still below 4% (3.7%) in December. “Overall, the policy stance to stimulate economic growth may remain. The MPC may not necessarily drop the repo rate in the next policy decision,” Rangarajan, who was also chairman of the prime minister’s economic advisory council during the UPA regime, said.

On December 5 policy review, the MPC led by RBI governor Shaktikanta Das, decided to keep the repo rate unchanged at 5.15%. In 2019, the MPC has cut repo rate by a total of 135 basis points.

Given that high inflation has surfaced at a time when economic growth is projected to slump to an 11-year low of 5% in FY20, many analysts and policymakers, including from the Niti Aayog, are debating whether India is facing a stagflation and hence, the need to tolerate a higher level of inflation than current framework of CPI inflation targeting to support growth. Some policymakers are even of the view that India should raise the pole from 4% to 6% in the inflation targeting framework. If the MPC fails to keep price rise in this band for three consecutive quarters, the RBI governor would have to write to Parliament as to why it failed and what corrective action needed to achieve the target.

However, Rangarajan cautioned against the perils of such a shift in inflation targeting. “Shifting of central pole to 6% plus/minus 2%, means inflation level will even go up to 8%. Such high inflation will have serious problems for any country because developed countries have about 2% inflation rate….one can not maintain exchange rate if inflation is very high,” he said.

“I don’t think, it is advisable to shift the pole from 4% to 6%. The monetary policy authorities must take a view on how long the inflation may even remain outside of 6%,” the former RBI governor said. The National Statistical Office’s projection of 7.5% nominal GDP growth in FY20 has factored in overall lower level of average inflation in the year.

On fiscal deficit, Rangarajan was of the view that it could be 3.6% of GDP in FY20 and FY21. The Centre’s Budget estimate for fiscal deficit is 3.3% for this fiscal and projected it to be 3% next fiscal, which are likely to be missed due to lower growth in revenues.