RBI deputy governor Poonam Gupta is upbeat on India’s growth prospects, especially due to a series of reforms. In her first interview since taking charge eight months ago, she tells TOI that the recent movement of the rupee is not a concern. Excerpts:What’s your overall assessment on growth and inflation, and are we nearing the end of the current interest rate cycle?On the growth front, if one simply plots India’s growth rate over the past four decades, the trend exhibits steady acceleration. Currently, we are in a position similar to the East Asian economies when they transitioned to high-middle-income status. Beyond demographics, India has the advantage of large domestic consumption and a diversified economic base, unlike countries reliant on a couple of sectors such as natural resources or manufacturing.Across different sectors, agriculture is becoming more resilient to natural shocks, with rising productivity driven by greater mechanisation, scale, and diversification. Manufacturing remains aspirational and is growing broadly in line with the average of agriculture and services, at about 7-8%. Within manufacturing, diversification is also increasing. Services, where India is a global leader, continues to be the largest and the fastest growing part of the economy.Reforms have picked up pace in recent years and have now cumulated to a point where they can deliver even stronger growth outcomes. That is why, despite a 50% US tariff and elevated global uncertainty, the Indian economy is performing well. With no new structural risks in sight, growth could easily come at 7-7.5% in the coming years, with limited downside risks. Given the reforms already undertaken, their ongoing momentum, and the underlying strengths of the economy, growth could move to an even higher trajectory in the years to come.What is the outlook on inflation?From a medium term perspective, inflation has been trending downwards. We are just about to complete 10 years of inflation targeting. Inflation has declined on average during the last 10 years and has become less volatile. Inflation has been exceptionally benign this year, and is likely to remain so for several months. RBI’s forecast for 2025-26 stands at 2%, the lower end of the tolerance band. Structurally, as economies become larger, more mature, and more prosperous, inflation tends to decline. This happens for several reasons: their capacity increases, productivity improves, and their supply response becomes faster.If one goes by these global trends, inflation in India too should continue to trend lower and become more stable in the medium term.As for the current policy rate cycle, the Monetary Policy Committee has already reduced it by a cumulative 125 basis points in less than a year. Thus, a significant action has already occurred in the current cycle. Yet, the current neutral stance gives it the flexibility to take further action depending on incoming data. If the inflation outlook remains benign and the inflation-growth outlook so warrants, then hypothetically the MPC could consider further action.Given trade tensions, how do we build buffers?The economy is doing well despite the recent tariff shock because of its in-built strengths and buffers. It is partly owing to diversification and partly attributed to quick and nimble policy responses. The increasing number of FTAs signed, alongside GST and labour reforms, is leading to further strengthening of these buffers.Forex volatility is a concern. How will it impact the economy and to what extent can RBI defend the rupee?India’s external position has been and remains resilient across both the current and capital accounts. On the current account, three pillars hold. First, we have always had a merchandise trade deficit, but it has not been accelerating. Second, services continue to perform ever more strongly. Third, remittances are large and roughly match the services surplus at about 3% of GDP. For a fast-growing emerging market economy such as ours, a 2-3% current account deficit is considered sustainable. This year’s CAD estimate is much below that at around 1-1.2% of GDP, reflective of a growing economy.On the capital account, India receives a healthy dose of FDI. Besides FDI, it receives foreign portfolio investment and other sources of capital such as bank flows and external commercial borrowings, among others. This year, foreign portfolio investment has been relatively weak. Research shows a pecking order for capital flows for their stability, with FDI being the most stable, and portfolio flows being more fickle.The current observed pattern of India’s capital flows aligns with this ranking.The rupee’s current trajectory aligns well with its historical trends. Average depreciation over the past decade is about 3% a year. There are variations from year-to-year around the 3 % average. There are years when the exchange rate depreciation has been higher, followed by relatively stable periods. This year’s slide, at around 4.5%, is aligned with past experience and is in the ballpark. The inflation pass-through of such a rate of depreciation is likely to be very mild, limited to a few basis points. Instead, it should work as an automatic stabiliser and be somewhat positive, in net terms, for the economy.You said there is enough room for expansion in the economy. You want to touch on your reading of the output gap?Going by RBI’s capacity-utilisation survey, utilisation is currently at about 74% and has not risen. Although we do not have hard data on the level of capacity utilisation when fresh investment actually kicks in, my working hypothesis is that the trigger threshold has likely moved up and that it varies by sector—some sectors may run close to 90% before adding capacity.Going by this, we still have slack in the economy and the capacity for the economy to grow faster.Besides, the production process itself has possibly changed. Services—and parts of manufacturing—have turned nimble. Through gig-style supply, and contract hiring they can meet demand faster than before, stretching their existing capacity further. Hence, strong growth—about 8.2% this quarter and near 8% in the last quarter—coexists with benign inflation. Headline, food, and even core ex-gold inflation remains moderate. Besides, wage pressures are absent suggesting that there is still slack in the economy, implying that we are unlikely to see inflationary pressures or overheating anytime soon.There have been some criticism of RBI’s inflation forecasting…Forecast errors are a common feature around the world. Inflation forecasting is even more challenging in India, given the high and outdated weight of food in the CPI basket and the volatile nature of food prices.Just like most other central banks, professional forecasters or multilateral institutions, RBI makes forecast errors too. However, there’s no systematic bias in these errors. Besides, we are constantly striving to improve our approach to forecasting inflation. RBI uses a suite of structural and time-series models to forecast inflation. These models are continuously reviewed and upgraded. In addition, we have enhanced our engagement and have stepped up stakeholder consultation including with agriculture experts, industry bodies, and professional forecasters. We engage more, listen harder, and treat criticism as input, not noise.Bottom line: RBI does its job well, without systematic bias. Still, we stay on our toes. The intention is that policy must keep pace with fast changing economy, with expanding digital commerce, shifting consumption baskets and changes in financing.MoSPI will be undertaking changes to GDP, inflation and industrial production data. What are the points that you are watching closely?RBI has a close, two-way engagement with MoSPI. We exchange views and inputs year-round. MoSPI has run an impressively extensive, rigorous, and consultative process in revising the series and we are keenly awaiting the revised data series.It is being widely anticipated that food’s weightage in the CPI index will likely fall in the revised CPI series. Equally importantly, the composition of food is likely to change too. If it results in a lower weight of volatile food items like specific vegetables, that will make inflation series even more stable. If inflation volatility drops, policymaking will become smoother and business decisions steadier.Another important issue to watch out for would be reweighting: which items in the price basket will gain as the weightage of food weightage shrinks. Overall, we must wait and watch to assess the net implication of a revised series on the level of inflation and its volatility.You spoke about following economies that have lowered inflation targets and narrowed the tolerance band, do you see RBI adopting multiple targets as well?Most countries which have adopted inflation target have a single objective of price stability. India follows flexible inflation targeting. Flexibility comes from the tolerance band and from the mandate itself—price stability, while keeping in mind the objective of growth. The US is one of the few economies which has a dual target, pairing inflation with employment.We recently reviewed global practice for our discussion paper on inflation targeting and found no shift across countries toward multiple targets. Countries are choosing to retain a single target of price stability. There have also been instances of countries like New Zealand which reverted to price stability as the sole mandate before briefly working with a dual mandate.Another issue to consider is whether central banks have adequate policy tools to target multiple different targets.Take the target of employment, for example. Employment depends on a number of factors: economic growth, skills, efficiency of labour markets; regulation; sectoral mix of the economy and their respective employment elasticities; policies at the state level; labour market regulations etc. Central banks don’t control most of these levers. Their main policy tool is the policy rate.Targets without tools would not be effective. That’s why central banks generally avoid multiple targets. I guess one must stay humble about what all monetary policy can deliver.Most IT frameworks target headline as the metric. Globally countries review their frameworks every few years. Some emerging markets have lowered targets and narrowed bands during such periodic reviews.Having once adopted it, no country has ever abandoned inflation targeting. It is believed to have worked well for the most part, and no credible alternative has emerged. Thus far, it remains the global default.What is your view on the debate over whether the focus should be on headline or core inflation?This issue is under review, so I’ll respond more narrowly based on my previous work on cross country experiences and the extensive consultations that we have conducted around the framework. Globally, many economies have recently reviewed inflation targeting—the US, Canada, the European Central Bank—each via different routes. We chose a consultative path. We issued a discussion paper, in which we invited views on a few focused aspects of the framework. We have collated the responses that we have received and are sharing them with the government.The response we have collated articulated clear messages. The majority of the responses favour retaining headline inflation. They have backed a 4% target for India’s current trajectory. They have cautioned against narrowing or reshaping the band amidst global and climate related uncertainty.What is being done to improve research and monetary policy communication?RBI houses one of the country’s largest pool of economists/statisticians. We are continually trying to build and leverage that strength harder. We are engaging more internally as well as with the wider research community. We are striving to improve the relevance, rigour and reach of our research offerings.Results are emerging, but this is a continuous process. Timely, relevant, and rigorous policy research is a moving target.In terms of communication, both the literature and practices have evolved. Earlier, it was believed that there ought to be surprises in monetary policy announcements in order for them to be effective. After the advent of inflation targeting, it is increasingly believed that more transparency, more engagement, and fewer surprises yield better outcomes. In fact, communication and forward guidance are now being considered as additional policy tools at the disposal of central banks.What are your thoughts on the FTAs being signed by India with other countries? Will they help diversify exports and imports?I see FTAs strengthening India’s resilience and speeding prosperity. Opening more external markets will help. Even amid a shock as large as a 50% tariff by the US, the economy has stayed calm—and new market access will further cushion it. Among the feedback that we hear, most stakeholders are comfortable and optimistic about the outcomes of the trade deals being signed.Will FTAs curb over-reliance on specific export/import partners? In principle, yes—but trade diversions can take some time. Capacity must exist in the trading partners; they must be able to supply what we import, at competitive prices, and vice versa.More markets opening—and a potential US deal—could make external demand stronger than before. That additional demand would have the potential for us to use our existing capacity better, spur investment, and lift growth. Taken together, this appears to be an inflection point, setting the stage for an accelerated take-off.So, there will not be any risk of overstimulation?I do not perceive any overstimulation risk at this point. Enhanced demand can be met without strain with capacity utilisation sitting at nearly 74%. If demand accelerates beyond what the current capacity can handle, then more investment will follow and result in additional capacity creation. I see no roadblocks to more investment occurring in such a situation. There is ample and affordable financing available to fund any such investment push. Most nominal indicators do not point to overheating in the foreseeable future.
