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Poonam Gupta, the newly appointed deputy governor of the Reserve Bank of India, has less than a week to prepare for the three-day monetary policy committee meeting beginning Monday. But, while it maybe be her first stint at the RBI, Gupta’s academic papers and articles point to a person who has strong views on inflation targeting framework and exchange rate stability. Given that she is stepping into the shoes of Michael Patra, who was considered an authority on monetary policy with his hawkish views, expectations are running high as the market keeps a close watch on her views.
trawls through her papers and articles to bring you a snapshot of Gupta’s views on policy-related topics. On Inflation targeting framework Gupta has been a strong supporter of the flexible inflation targeting regime and written that it has served India well. In an article published in titled dated September 2023, Gupta argued that the inflation targeting framework of 4% with a band of plus or minus 2 percentage points in its ninth year needs a fresh look.
She has suggested that the RBI consider options including increasing the inflation target to 4.5%, situated within a narrower band of 3.5-5.
5%. “In comparison to the other emerging markets, India has not revised its IT framework since its inception seven years ago, continuing to maintain the inflation target of 4 percent and a wider band of 2%. This is despite the fact that it has not been able to achieve a 4% headline inflation rate during six of the eight years; and its core inflation has far exceeded 4% for the majority of these years," she said in the article.
“It would be erroneous to argue that an inflation rate of 4.8% would be inimical to growth. There is no clear trade-off between growth and inflation at moderate inflation levels.
" In an NCAER paper titled co-authored with economist Barry Eichgreen on 29 August 2024, Gupta argued for the continuity of price stability as monetary policy committee’s (MPC) core mandate. “In our view, giving too many responsibilities to the central bank risks diverting senior personnel’s time and focus from their primary duty of achieving price stability. It can overload and distort the conduct of interest rate policy and destabilize inflation expectations.
A more complex mandate hinders central bank accountability by making it harder to evaluate its actions relative to its objectives," they said. "Given this record, radical changes such as broadening the RBI’s monetary mandate, abandoning the target in favor of a more discretionary regime, targeting core instead of headline inflation, or altering the target and tolerance band would be risky and counterproductive." Gupta has also been highlighting the need to update the weight of food prices in the inflation index.
The current basket, which accords a weight of 45.8% to food, has not been revised since fiscal year 2012. “The estimated weight of food for India at today’s per capita income would be less than 40% instead of the current 45.
8%; and would decline to below 30% in a decade from now. This correction itself should ameliorate the concerns on account of food inflation being a part of the inflation target," she said. On inflation and inflation expectations In an article published in on 20 December 2022, Gupta suggested price stabilization efforts to balance domestic demand and supply issues for vegetables.
“It is really sad in a way that our monetary policy is held hostage by vegetable prices. And monetary policy is a blunt instrument to address that kind of inflation," Gupta underlined, suggesting price stabilization efforts to balance domestic demand and supply issues for vegetables. “Surely, our economy, which is more than $3 trillion, can manage its vegetable prices better than it has," she added.
Trump & capital flows In a recent article on Tackling the Impact of Trump Tantrum dated 10 March, Gupta said the RBI should avoid excessive volatility of exchange rate and the use of forex reserves to absorb shocks. “For ex ante measures, India should encourage stable, longer-term capital inflows (such as FDI) over volatile short-term flows (like FII flows). It should rebuild its reserves buffer as soon as the conditions turn conducive.
While avoiding excessive appreciation or volatility of the exchange rate, it should still let it move more than has been the case in the recent past. To soften the impact ex post, fine calibration of exchange rate depreciation and use of reserves is needed. In recent years, policy response has shifted more toward the use of reserves while limiting depreciation of the exchange rate.
This ought to be revisited for speedier mitigation of shocks," she said. Even during 2022, when the rupee saw an 11% fall, Gupta had supported depreciation, instead of using forex reserves. She said that the exchange rate ought to be treated as an automatic stabilizer.
“A competitive exchange rate itself can boost both capital and current account inflows. For now RBI should be comfortable letting it slide (gently if it so wishes) by another 5% in the coming months and even more if the external market pressure continues," she said in an article dated 14 July 2022. State Finance Gupta also came down heavily on poor fiscal management by some states, saying that there is a need to overhaul the fiscal rules.
“There may be room for a fiscal “grand bargain", where heavily indebted states receive some debt relief (a portion of their debt is transferred to the balance sheet of the central government) in return for them conceding additional central government oversight, amending their practices, and even some dilution of fiscal autonomy. Such bargains have worked in other fiscal federations," she said. Reforming the rating agencies Gupta has also shared her strong views on credit rating agencies.
In an article published in 2023, she said that emerging market and developing economies including India are meted out unfair treatment by the rating agencies. She has strongly defended the case for a revision in India’s ratings. “It would be worthwhile for India to engage with the credit rating agencies to better understand their metrics; while reinstating its public debt on the pre-Covid consolidation trend; in order to make even a stronger case for a rating upgrade," she said.
“The ratings are only as good as the data used as inputs for it, and data on the external debt figures of governments (and their compositions) are notoriously inadequate. It would be useful to pursue greater accuracy and transparency of debt statistics.".
