The pace of interest rate increases should be calibrated from here on to ensure economic recovery in India does not stall as the Reserve Bank tries to bring inflation within its tolerance band, monetary policy committee member Ashima Goyal said.
"We need to be very careful that growth is not snuffed out and we don't go into another decade of slowdown," Goyal told Reuters in an interview on Tuesday.
Inflation in India has remained above the Reserve Bank's 2 per cent-6 per cent tolerance band for eight consecutive months and rose to 7 per cent in August, driven by surging costs of food items.
"It has been multiple supply shocks I would say," Goyal said, referring to the current high level of inflation.
"And there is generalisation in the sense that it has continued for a long time and some inputs costs have been passed on."
The RBI has raised rates by 140 basis points since May and analysts expect another 35-50 basis points increase in its next review at the end of this month.
Unlike in developed markets like the United States, fiscal stimulus in India has been limited and labour market conditions are not tight, Goyal said.
While the Indian economy is also seeing pent up demand, other indicators such as industrial production have signaled some slowdown.
"We have to watch the data very carefully and in my view yes, go very slowly and not be in a hurry to reach a terminal rate because the last decade we have seen that the terminal rate was such that it triggered a slowdown and it really persisted," Goyal said.
"So in my view we have to go very slowly from here."
In a working paper published this month, Goyal and her co-author Abhishek Kumar had written that recent policy decisions by the RBI have been in the right direction where the bank approached the inflation originating from a food price shock more pragmatically.
The inflation-adjusted real rate should move into "positive territory but very slowly because we are coming out of a slowdown," Goyal said.
Alongside monetary policy tightening, the Indian government has taken steps such as curbs on exports of wheat and rice to cool food inflation.
"To the extent the government is acting on inflation, the central bank has more room to keep real rates low," Goyal said.
Keeping interest costs below the rate of growth in the economy will also help fiscal consolidation and bring down India's debt-to-GDP ratio from 84 per cent in the fiscal year ended March 2021, as per Moody's estimate.