"Monetary Policy Transmits to Economy With a Lag; Inflation to Come Down Next Year"
-Dr. Sudarshan Bhattacharjee,Principal Economist, Yubi (Formerly, CredAvenue)
"Futuristic India Should Reduce Emission Intensity of GDP, Ensure Sustainable Living, Speed-Up Non-Fossil Fuel Based Energy & Create Climate Smart Agriculture"

Intro: This week on Socio-Economic Voices we have Dr Sudarshan Bhattacharjee, Principal Economist, Yubi (Formerly, CredAvenue) talking about the various concerns that the Indian economy is facing amid the global recession, its own economic issues as well as the ongoing drastic climate change. Speaking to Senior Journalist Mahima Sharma, the former ICICI Bank Economist, Dr Sudarshan talks about the banking sector and how the RBI policy is expected to bring about inflation relief by next year. A breakdown of our and your concerns by the expert who has an expertise in banking, credit ratings, regulators, think tanks, and other fields. For the exclusive interaction, take a read.

MS: Central banks have been tightening their monetary policies aggressively, but inflation doesn't seem to come under control. Do you think this is the right approach? If not, how can inflation be tamed in India?

SB: Globally inflation has remained stubbornly high and stayed above the target for most of the central banks. Higher inflation has led to negative real rates for many countries. In response to tackle higher inflation rates the central banks have increased their policy rates and taken other measures. Inflation has moved higher globally due to double whammy came from Covid-19 and now the prolonged geopolitical tensions. Earlier, the impact of Covid-19 created supply side bottlenecks that caused prices to increase. Now the Russia-Ukraine war has led to a severe energy crisis in Europe thus raising the cost of living significantly. The US inflation remained above 8% year on year for seven months in a row till September. The rise in interest rates will work their way through the economy to control inflation within some time. Generally, monetary policy transmits to the real economy with lags of a few quarters. So eventually, the inflation will come down. The IMF recently projected global inflation to increase at 8.8% in 2022 from 4.7% in 2021 and then to ease to 6.5% in 2023 and 4.1% in 2024. Moreover, the expansionary fiscal policies that different governments of the globe resorted to during the Pandemic are now being withdrawn in a phased manner. This will support central banks’ fight to bring inflation down gradually.

In India, the retail inflation measured in terms of consumer price index (CPI) remained above the Monetary Policy Committee's upper band of 6% in the last 8-months with September CPI print coming in at 7.4% year on year. We observed that headline inflation was driven by higher food inflation in the last month with visible price pressures in vegetables, spices and cereals. The core inflation remained sticky and hovered around 6%. MPC increased the policy repo rate by cumulative 190 basis points since May 2022 starting with an off-cycle rate hike. As mentioned earlier, monetary policy transmits to the real economy with a lag of a few quarters. Hence, we will see the impact of MPC's rate hikes on inflation from early next year. Already we have seen wholesale prices in September had a broad based easing. In coming months a favorable base will help ease inflationary pressures to some extent.

MS: Inflation has been higher than the RBI's upper tolerance in the last few months. While the RBI has raised rates by 190 basis points since May (repo rate stood at 4% in May and now it is at 5.9 %), a significant part of inflation is driven by higher food prices. Do you think that food inflation can be controlled by rate hikes? If not, then can the aggressive rate hike by the RBI actually be counterproductive to the economic growth rate?

SB: Elevated food prices, fuel & light and core inflation have all contributed to higher CPI numbers. Food inflation remained above 7% in the last two months till September. Food prices had to go through various shocks in recent times. The MPC’s successive rate increases will have their impacts in taming overall inflation with some lag. In addition to MPC rate hikes; the Government of India has taken various measures to control food inflation in recent times. The Government in the first week of October extended the concessional custom duty on import of edible oil till March 2023 to control domestic prices. Earlier the government had put a prohibition on export of wheat to control prices. India had banned export of broken rice and imposed 20% export duty on certain non-basmati rice. Going forward overall CPI is expected to ease somewhat with easing momentum and a favorable base in food.

MS: The forex reserves globally have depleted below USD 1 trillion. Domestically also, the forex reserve of the RBI has come down considerably in the last few months. Do you feel that RBI can control the rupee depreciation effectively given falling reserves?

SB: Monetary tightening in the wake of higher inflation and concern of global slowdown has led to flight of capital from emerging economies resulting in appreciation in USD. As the USD jumped two decades higher against other reserve currencies, it reduced the dollar value of these currencies. India’s forex reserve has come down by about USD 74bn from the beginning of FY23, the reserve position is still at a comfortable level to fund its import bill for about 9 months. Moreover, the ratio of India’s short -term debt to foreign exchange reserve is at about 22% which is lower compared to historical trends and thus there is no threat to external debt servicing. Hence, overall the forex reserves of India is still in a comfortable position for RBI to intervene in the forex market.

MS: As per the September 2022 ICRA report, India's current account deficit (CAD) will widen to 5% of the Gross Domestic Product (GDP) in the September quarter due to higher merchandise trade deficit. The trade deficit stood at an elevated level of USD 149.47 billion for H1FY23 due to 38% increase in imports and 17% increase in export during H1FY23. What is the best solution/ solution in sight for India?

SB: The global headwinds have impacted the international trade momentum. According to the IMF forecast of October 2022, world trade volume (goods and services) will slow down to 4.3% in 2022 from 10.1% in 2021. The world trade volume will further slowdown to 2.5% in 2023. The effect of global trade slowdown is visible in India’s exports. On the other hand, imports remained elevated as India's growth outlook was stronger. This is reflected in higher non-oil non-gold imports. The Current Account Deficit (CAD) increased to USD 23.9bn (2.8% of GDP) in Q1FY23 vis-à-vis USD 13.9bn in Q4FY22 (1.5% of GDP) due to higher merchandise trade deficit. Recently, merchandise export had a sequential decline of 3.8% in September to USD 35.4bn though registered a growth of 4.8% year on year basis. On the other hand, imports stood at USD 61.1bn taking the trade deficit to USD 25.7bn in September. Foreign trade settlement in Indian rupee is one of the ways to boost India’s international trade further amid global slowdown. This will increase India's ambit of bilateral trade. Moreover, as the Economic Survey (2019-20) suggested, "assemble in India", especially the network products will increase India's share in global export. India has done FTA with UAE and Australia and currently is negotiating with the UK. These FTAs will increase India's trade share going forward. Moreover, Government's efforts towards production linked incentive schemes, Atmanirbhar Bharat will result in import substitution and export promotion.

MS: What kind of FDIs and global pacts must India look at to step up the momentum of the economic recovery? And how can this be formulated in a way that brings relief to the ground level citizens?

SB: As far as foreign direct investment is concerned India has remained a bright spot. The country received USD 44bn net FDI in FY21 and USD 38.6bn in FY22. India is emerging as a preferred destination for foreign investment in manufacturing. FDI equity inflows in manufacturing moved up by 76% in FY22. The Government continued to liberalize investment barriers and eased regulatory restrictions. It permitted foreign investment under automatic route in most sectors.

As far as global pacts are concerned India has signed some important trade agreements such as Comprehensive Economic Partnership Agreement (CEPA) with UAE, Economic Cooperation and Trade Agreement with Australia in 2022. It is negotiating a free trade agreement with the UK. More such trade agreements are the need of the hour that will help grow India's export, safeguard supply chains and diversify sources which will benefit farmers, MSMEs, local manufacturers and create additional employment.

MS: Each state is jostling at its own level amid drastic climate change in the last two years (floods, droughts and more). Many farmers have quit farming amid the threat of a food crisis looming large over the next decade. At a war footing, what kind of plan-ahead steps India must look at?

SB: Growing global population and change in diet will lead to higher demand for food. Agriculture is vulnerable to climate changes. Climate change can reduce crop yields, livestock productivity, and nutritional value of cereals. Agriculture itself can generate a significant portion of greenhouse gas emissions. India has taken several measures in its fight against climate change. India secured 10th rank in the climate change performance index in 2022. It received high performance ratings in greenhouse gas emission, energy use and climate policy categories. In August 2022, India updated its nationally determined contribution (NDC) to the United Nations Framework Convention on Climate Change. Going ahead the focus should continue on reducing emission intensity of GDP, sustainable living, faster move towards non-fossil fuel based energy, climate smart agriculture by developing more climate smart villages to help farmers improve productivity, while mitigating greenhouse gas emissions.

MS: What are the sectors you feel have good prospects for growth amid the global recession making its pinch felt in India? And which sectors need to be seriously looked into, need serious CTA plans to curb the downfall?

SB: Agriculture remained a bright spot despite first advance estimates of production of kharif food grains for 2022-23 was lower by 3.9% over the 4th advance estimate for 2021-22. The sector has maintained steady growth in the past with a 4.5% increase in Q1FY23. Total rainfall during the monsoon was about 6% above the long period average. However, temporal and spatial distribution of rainfall was uneven. The late revival of the southwest monsoon will be good for the rabi season. Good soil moisture and higher reservoir levels along with availability of major fertilizer groups and seed categories brighten rabi prospects. Real estate segment has seen recovery over the past few quarters led by the residential segment. The pent up demand along with lower interest rate and relatively affordable prices helped demand for residential units. In the September quarter, residential sales increased by 15% year on year in major cities in India. The rate hiking cycle has not significantly impacted demand as affordability still remains the dominant factor in decision making. Demand for high end residential spaces have seen traction. The Digital India drive brightens the prospect of the digital sector. Digital transactions continue their advance across various payment modes with both large value and retail modes showing significant growth. The contact intensive service sector that suffered due to the pandemic has revived but still needs to recover. Trade, hotel, transport and communication sector growth increased by 25.7% year on year during Q1FY23 but was down by 15.5% compared to Q1FY20 i.e. pre-pandemic levels. However, the sector will improve with further economic momentum.

MS: The credit growth has picked up recently, and now it's been above 16%. Do you feel it's going to sustain? What would be its further effect on the NPAs in the system?

SB: The economic conditions have been improving with momentum in manufacturing and services. Traction in private consumption will improve overall demand conditions and will get further boost from festive demand. Government’s capex push is leading to higher investment activity. All these positive factors are getting reflected in the form of higher credit demand in the economy. For example, we see that credit growth to agriculture has been robust. Credit offtake by agriculture has remained in double digit in the past several months. The above normal monsoon augurs well for winter crops which will raise demand for agriculture credit. Similarly, industrial credit has shown signs of traction with industrial credit offtake increased by 11.4% year on year in August. Capacity utilization in the manufacturing sector remained above 70% in the last three consecutive quarters till Q1FY23. Industrial production had shown steady growth and increased by 7.7% during April-August 2022-23. Personal loans segment witnessed double digit growth consecutively in the last 18-months indicating traction in consumer demand. Credit in the service sector has also been growing at a rapid pace.

The banking system NPA has come down recently along with improvement in capital adequacy ratio. Scheduled commercial banks’ NPA are down for both wholesale and retail loans. Going forward the banks’ NPA ratios are likely to remain low on higher credit disbursement and better credit quality.

MS: Recently the IMF Director hailed the Indian economic growth as the 'Bright spot on dark horizon' amid recession fears. How do you think India will shine bright in the next three crucial years? What would be its assets amid economic threats from China?

SB: India's domestic demand outlook remains robust and despite external headwinds India's growth fundamentals are strong. Moreover, it undertook various supply side reforms such as deregulation of various sectors, process simplification, production linked incentive schemes, revised definition of MSMEs and their simplified registration process, etc. The country has undertaken reforms that are attracting FDI. The Government's emphasis on capex will crowd in private investment. Government has budgeted INR 7.5tn capex for FY23. The corporate credit quality measured as a ratio of upgrades to downgrades have improved significantly. The bank credit clocked a growth of above 16%. Hence, India's growth drivers are fundamentally strong. The Chinese economy is expected to slow down amid Covid-19 induced lockdowns. It provides an opportunity for India to increase its export share.

MS: A survey jointly conducted by EY and CII showed India's focus on reforms and economic growth will give rise to foreign direct investment (FDI) opportunities of $475 billion in the next five years. How do you think India must utilize this opportunity?

SB: India's focus on reforms are well acknowledged globally and this has led to significant inflows of FDI in different sectors. India will attract FDIs on a sustained basis as it is seen emerging as a global manufacturing hub and has a large base of consumers and a frontrunner in digital drive. The large foreign investment should be used efficiently to improve productivity and create employment opportunities.

MS: Recently, our FM Nirmala Sitharaman has said that the rupee is not sliding but the dollar is strengthening. How do you elaborate on this statement?

SB: Due to higher global inflation and tight monetary policy there is a flight of capital from emerging economies. As a result, currencies of major economies depreciated against the dollar. The US Fed delivered a 75 basis point increase in policy rate and gave a very hawkish guidance in September that led to significant appreciation of the dollar index. The dollar index appreciated by 3.3% month on month in September whereas Indian rupee depreciated by a modest 0.8%.

About Dr Sudarshan Bhattacharjee

Dr Sudarshan Bhattacharjee is the Principal Economist at Yubi (Formerly, CredAvenue). He has over 15 years of professional expertise in banking, credit ratings, regulators, think tanks, and other fields. He specialises in economic research and holds a wealth of knowledge in macroeconomics, public policy, financial markets, competition law, and other areas. He led the domestic economic research unit during his last stint at ICICI Bank. As a corporate researcher, he has produced numerous high-impact research papers featured in several peer-reviewed journals listed in ABDC, Ebsco, Sage, University Grants Commission (India), and so on. He has also been associated with the Central Bank of India, CRISIL, Royal Bank of Scotland Business and Genpact, among others previously. Sudarshan has a master’s degree in economics from the University of Hyderabad and a doctorate in economics from the University of Mumbai.

About the Interviewer

Mahima Sharma is a Senior Journalist based in Delhi NCR. She has been in the field of TV, Print & Online Journalism since 2005 and previously an additional three years in the allied media. In her span of work she has been associated with CNN-News18, ANI - Asian News International (A collaboration with Reuters), Voice of India, Hindustan Times and various other top media brands of their times. In recent times, she has diversified her work as a Digital Media Marketing Consultant & Content Strategist as well. Since March 2022, she is also an Entrepreneurship Education Mentor at Women Will - An Entrepreneurship Program by Google in Collaboration with SHEROES. Mahima can be reached at

Disclaimer : The opinions expressed within this interview are the personal opinions of the interviewed protagonist. The facts & statistics, the work profile details of the protagonist and the opinions appearing in the answers do not reflect the views of Indiastat or the Journalist. Indiastat or the Journalist do not hold any responsibility or liability for the same.

indiastat.comOctober, 2022
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