Nobel laureate Diamond suggests India take defensive stance on monetary, fiscal policy amid global tightening

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Douglas W Diamond, the Nobel Memorial Prize winner in Economic Science in 2022, has advised Indian policy makers to be defensive in their monetary and fiscal response to global tightening. In an interview, Diamond stated that India’s inflation rate is in good shape compared to the rest of the world. He also emphasized the importance of India responding to the global monetary tightening in an appropriate way to prevent economic activity from slowing down.

Both the US Federal Reserve and the Reserve Bank of India (RBI) have reduced the pace of interest rate hikes, but have remained hawkish in their outlook. In December, the Federal Reserve raised key interest rates by 50 basis points to the highest level in 15 years, while the RBI raised its key repo rate by 35 basis points to 6.25%. Diamond pointed out that the Federal Reserve and other central banks around the world need to be cautious about the pace of tightening interest rates. “A spike in interest rates hurts all the short term debt financed firms, institutions, and insurance companies,” he said.

India’s retail inflation fell to an 11-month low of 5.88% in November 2022, marking the first time this year that it has fallen below 6%. The RBI has kept the inflation target for the fiscal year unchanged at 6.7%, but has cautioned that the battle against inflation is not yet over. Diamond’s advice for India is to remain defensive in its monetary and fiscal policy in response to the global tightening. This includes being mindful of the pace of interest rate hikes and taking steps to ensure that economic activity does not slow down.