This will be Gupta’s maiden policy-making role. She entered RBI after spending a significant part of her career with the World Bank and the International Monetary Fund (IMF). Her prolific newspaper writings suggest that her views on policy matters are not always fully aligned with those of RBI and the government.
Gupta is categorically opposed to the RBI’s exchange rate policy, and, as recently as last month, argued for letting the rupee depreciate more than the RBI has allowed. Persisting with such an approach could at once get her into the BJP’s crosshairs. A stronger rupee and a muscular attitude in times of global economic tumult remain the party’s preference.
Calmer times may be a long way off. Trump’s reciprocal tariffs will go into effect this week. A global trade war is imminent. The tensions could spill into financial markets worldwide. The benchmark equity index Sensex and the Indian rupee are on a rollercoaster ride already.
Things aren’t going to be quieter at home. After the completion of ten years of implementation, the RBI’s inflation targeting framework will be due for a review in 2026. The RBI and government will kick off deliberations for which this year itself. Members of the RBI’s monetary policy committee (MPC), which Gupta is expected to join as deputy governor in charge, have in recent meetings, the minutes show, initiated a debate on what the inflation target, currently set at 4%, could be.
For a long time, Gupta has been of the view that 4% inflation is too low for India and something like 5-5.5% would be better.
Inflation in focus
For a long time, Gupta has been of the view that 4% inflation is too low for India and something like 5-5.5% would be better. She made the case at a panel discussion hosted at the Columbia University in November 2022 that was moderated by trade economist Arvind Panagariya, under whom Gupta had completed her PhD, also on trade.
Hawkish voices from the MPC, especially from its RBI members, had argued at that time that monetary policy’s role was to first return inflation from 7% to the tolerance band (2-6%) and then align it with the 4% target.
Defending this, the then governor Shaktikanta Das even cast the RBI in the role of the Mahabharata’s ace archer, Arjuna, in the hope that this sort of communication would put caution into pricing decisions through the economy. The RBI was worried that inflation expectations were about to get unhinged, as businesses and households were tightening their belts as inflation eroded their purchasing power.
But Gupta was among those who saw high inflation as transient, which the MPC could afford to see through as it was sure to ease within a “couple of months” – on demand and supply mismatches in food getting resolved. “Vegetable prices are holding India’s monetary policy hostage,” is how she put it.
In hindsight, the MPC’s worries were validated when voters reduced the BJP’s tally to below the majority mark in the Lok Sabha elections last year, dissatisfied over, among other reasons, the cost of living. The government’s latest estimates show that real GDP growth in 2023-24 was 9.2%, the fastest in over a decade, which has taken the wind out of the public attacks on the RBI’s monetary policy record.
Also Read: Mint Quick Edit | Inflation: In RBI’s control at last?
Dovish stance
In February this year, Gupta wrote about the RBI’s monetary policy, calling for a dovish stance and a fresh look at the inflation target of 4% and the framework’s other specifics.
It is not clear if she is airing New Delhi’s view. The government’s view isn’t known yet and may not have been formulated yet. In 2016, Prime Minister Narendra Modi and the then finance minister Arun Jaitley settled for the 4% target, convinced that higher inflation would hurt the poor. The RBI, more or less, aimed to keep inflation at 4% in the decades preceding the formal introduction of the inflation targeting framework.
Gupta reflects the consensus view when she calls for improvements in forecasting and transmission of monetary policy.
A number of economists get caught on the wrong foot on the inflation-growth trade-off partly because the government has not yet updated the CPI basket to reduce weights for food items in line with the findings of the latest household consumption surveys. This is expected to be complete next year.
It also hasn’t helped that RBI’s inflation and GDP growth forecasting has consistently been off-mark, often resembling guesswork.
Among other things, North Block will watch Gupta keenly on her position so far that the government needs to reduce the debt-GDP ratio at a faster pace than it has.
Also Read: Rupee has put RBI between a rock and a hard place
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