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‘RBI monetary policy too conservative’

The RBI is being too conservative in its monetary policy and the government is right in criticising the central bank on this count, according to Christopher Wood, managing director and equity strategist at CLSA, a capital markets and investment group.

He said that the central bank should make it clear whether it was targeting headline inflation or core inflation, since the former had been falling and as such did not warrant a conservative monetary policy.

“Monetary policy in India is tight,” Mr. Wood said. “I personally agree with the government, it is too tight. They have very high real rates compared to headline inflation. Now core inflation is higher, but monetary policy is based on headline inflation. So therefore, the monetary policy is too tight. If the RBI is actually also tracking core CPI, then they should tell the market, but they haven’t said that. Personally, I am somewhat sympathetic to the criticism.”

Mr. Wood also said that the biggest risks to India, even in the run-up to the 2019 general elections, were the U.S. dollar and oil prices.

‘Biggest risk’

“The biggest risk in India is if oil prices skyrocket,” he said. “That risk has been reduced recently, but it was a huge risk when the U.S. was doing its sanctions thing. My opinion is that Saudi Arabia doesn’t have in reality the oil reserves that they claim.”

“Oil at $150 is a possibility if you get politically driven supply disruptions,” Mr. Wood said. “We were looking at one... The Indian government was planning to cut its imports from Iran because there was the threat of secondary sanctions.”

The earlier belief that shale oil production in the U.S. would kick in higher oil prices to effectively cap it had now been belied by a number of factors. “Shale production is going up, but I don’t think it can fill the gap left by the conventional oil industry,” Mr. Wood said.

“The ability of shale to crank up production dramatically is limited because some of the best shale areas are already depleted. I used to believe that above $60 oil prices would be capped because shale would come roaring back. But then I realised that I hadn’t fully factored in the extent of the collapse in conventional oil industry investment. Plus, the financing of shale in the U.S. has become much more conservative.”


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Printable version | Oct 17, 2021 7:19:10 PM | https://www.thehindu.com/business/rbi-monetary-policy-too-conservative/article25498996.ece

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