India has demonstrated that it possesses the underlying economic potential to sustain growth rates above 7.5 per cent without triggering inflation, Reserve Bank of India (RBI) Deputy Governor Poonam Gupta said on Friday.
Speaking at the Isaac Centre for Public Policy Growth Conference, Gupta highlighted that in the past few quarters or years, India’s growth rate has been at 7.5 per cent and inflation has remained below 4 per cent. “That convinced me that the underlying potential of the economy is such that we can grow in a non-inflationary manner at a rate higher than 7.5 per cent,” she reckoned.
On India’s balance of payments (BoP), Gupta was equally confident, describing the country’s external account as resting on structural rather than cyclical foundations. Remittances, net services exports and Foreign Direct Investment (FDI) inflows, she argued, are not temporary strengths that ebb and flow with global conditions but are durable pillars that persist through shocks.
“I am quite confident that our balance of payment has this inherent strength,” she said, acknowledging that portfolio flows had been weaker in recent periods but arguing these had been absorbed by the strength of other components.
On monetary policy transmission, Gupta offered a robust defence of the current easing cycle’s effectiveness, pushing back against a narrative that elevated bond yields signal a breakdown in the pass-through from policy rates to borrowing costs.
After examining transmission holistically across the current cycle and comparing it with the previous two easing cycles, she concluded the results were at least as good, if not better. “Transmission has been very good and at least as effective as in the past,” she said. The short end of the yield curve had seen near-perfect transmission, the middle end had responded very well, and even the long end–while less responsive– was being influenced by factors well outside the RBI’s control, including global dynamics and long-term inflation expectations.
Further, she pointed out that the CPI basket took 12 years to be updated and flagged whether it should be updated more frequently as one of the questions likely to animate future discussions around the framework’s next review before 2031.
She noted that if the basket were refreshed every three to five years, and as the weight of food and other volatile items naturally declines with changing consumption patterns, “perhaps the framework can work very well.”
On the responses to the discussion papers posted by RBI, she said that more than 60 per cent of respondents to the paper on India’s inflation framework backed headline CPI as the appropriate target, over 90 per cent said the 4 per cent rate should be retained, and a large majority felt the current plus-or-minus 2 per cent tolerance band should stay.
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