Poonam Gupta Appointed RBI Deputy Governor

Key Highlights of Poonam Gupta’s Appointment

• New Role: Appointed as Deputy Governor of the Reserve Bank of India (RBI), likely overseeing the monetary policy department.
• Significance: Her appointment comes days before the April 7-9 Monetary Policy Committee (MPC) meeting, which may decide on further interest rate cuts.

Challenges & Policy Priorities

• Monetary Transmission Issue:
  • The repo rate was cut in February, but transmission to corporate loan rates (MCLR) and deposit rates remains weak.
  • Banks have reduced rates for retail and small business loans (EBLR-linked) but not corporate loans.
  • Liquidity remains a key factor—RBI has infused ₹5 trillion through government securities purchases and ₹1.8 trillion via repo operations.
• Liquidity Management:
  • Banking system liquidity turned from deficit to a small surplus recently.
  • RBI officials to meet bankers on April 4 to fine-tune the liquidity framework.

Debate on Inflation Targeting & Policy Framework

• Core vs. Headline Inflation:
  • Some experts argue RBI should target core inflation instead of headline inflation, which is often driven by volatile food prices.
  • Gupta co-authored a 2024 paper with Barry Eichengreen, advocating against drastic changes to the inflation-targeting framework.
• Proposed CPI Basket Adjustment:
  • Suggested reducing the food weight in CPI from 45.8% to ~40%, considering rising per capita income.
  • Expected to decline to 30% in a decade due to structural shifts.

Market Expectations from Gupta in April MPC Meeting

• Rate Cut Stance:
  • Whether she supports a rate cut larger than 25 basis points, indicating her priority between growth and inflation.
• Policy Stance Shift:
  • If she supports changing RBI’s stance from neutral to accommodative, given the recent large liquidity infusion.