Banks should take measures to increase deposit growth

Intro: Credit growth has exceeded deposit growth for some time now and banks cannot continue to rely on short-term borrowing and liquidity to meet the demand, believes Ashima Goyal, external Monetary Policy Committee member. She tells Piyush Shukla that the target is that inflation should not reach 4% but stay there. Excerpts:

As you mentioned in MPC minutes, the scope of further rate hikes by the US Federal Reserve is limited. Is the MPC also thinking on similar lines?

But the Fed’s recent decision illustrates that policy can remain restrictive and focused on achieving its inflation target even with projections of rate cuts. Policy is disinflationary if real rates are positive and above neutral.

Do you expect further transmission of repo rate hikes in deposit rates?

Credit growth has exceeded deposit growth for some time now. Banks cannot rely only on short-term liquidity and borrowing, and should take measures to increase deposit growth. What they do is up to them. Some transmission continues automatically. As old deposits mature they are refreshed at higher current rates.

By when can we expect retail inflation reaching 4% mark?

Reaching 4% is not enough, it should stay there. Quite a few past forecasts of inflation approaching 4% have been interrupted by supply shocks. The good news is these shocks are becoming more transient. This is a feature of a mature inflation targeting regime. So we need to watch for some time until we are confident that even if shocks occur they will not interrupt progress to the 4% target.

With increasing input costs as seen in WPI, can we expect the core inflation to move upward anytime soon?

There is no one to one correspondence between the WPI (wholesale price index) and core CPI (consumer price index). Despite a very large rise in WPI, core CPI did not rise as much over the past year. Many other factors influence core CPI and some of these are working to reduce core CPI. Firm profit margins are healthy. They do not need to raise prices.

What supply side measures do we need to prevent frequent food price spikes?

We need diversification of key crops using our variety in geographical zones, shorter crop cycles, agricultural supply chains to work more efficiently, more retail chains should procure directly from farmers as an alternative to mandis, better food processing, storage and use of imports to smooth availability of supplies.

As we enter the general election year, do you expect volatility in equity or debt markets?

Market volatility is unlikely especially as the recent state election results support expectations of stable electoral outcomes. More diversity in market participants reduced volatility in Indian equity markets last year despite large fluctuations in foreign equity flows. Next year more debt inflows are expected, but markets now have the depth and size to absorb these. Higher absolute amounts are now lower as a percentage of GDP than lower amounts were in the past.