Reserve Bank of India Governor Shaktikanta Das
Highlight
- Retail inflation remains above RBI’s upper tolerance level of 6 per cent since January
- Shaktikanta Das said RBI’s decision to keep rates unchanged is in line with economic requirements
- RBI hikes rates twice in a row within a period of 36 days to tackle inflation
Reserve Bank of India (RBI) Governor Shaktikanta Das has refuted criticism of the central bank that it has fallen behind the inflation curve. Speaking at an event in Mumbai on Friday, Das sought to defend policy actions, saying that focusing on inflation management first would have ‘disastrous’ consequences on the economy. He said that the RBI is in line with the needs of economic development.
The Consumer Price Index (CPI)-based inflation, which the RBI factors in when it comes to its monetary policy, has been rising since October 2021. Retail inflation has remained above the RBI’s upper tolerance level of 6 per cent since January. In April, it had reached an 8-year high of 7.79 percent.
“Tolerance of high inflation was a necessity, and we stand by our decision,” Das said. The laws governing the RBI explicitly mention the management of inflation, while taking cognizance of the growth situation.
RBI focused on growth in the pandemic situation and took a lenient stance to further bolster the liquidity position. The six-member Monetary Policy Committee (MPC) unanimously voted to keep the policy rate unchanged at 4 per cent throughout the pandemic. But the central bank earlier this year decided to put inflation ahead of growth in its order of priorities.
The central bank, in the first week of May, at the off-cycle policy meet, raised the benchmark lending rate by 40 bps to 4.40% and then by 50 bps to 4.90%.
Das said that despite maintaining a liberal stance, the economy shrank by 6.6 per cent in FY2011. He made it clear that even 3-4 months back the focus could not be on fighting inflation.
‘Growth reached pre-epidemic level in March’
In March, the RBI realized that economic activity was above pre-pandemic levels and decided to focus on curbing inflation, Das said, adding that it may not deliver a huge rate hike immediately.
“RBI has acted proactively and I do not agree with any assumption or any description that RBI has fallen behind the curve. Just imagine if we had started raising rates early, the growth rate would be what would happen?”
Clarifying that the FY23 inflation forecast at 4.5 per cent in February 2022 was not optimistic, Das said the calculation was done with an assumption of USD 80 per barrel of crude, but the developments following the Russian invasion of Ukraine were central. A few days after the bank went public with it, has given rise to a changed scenario.
On liquidity, he said that all measures taken by RBI during the pandemic were with sunset clause, but factors beyond the control of the central bank such as multiple waves of infection and war have prolonged the exit from easy liquidity measures.
The governor assured that the exit from the easy liquidity situation will be easy and there will be a “soft landing”.
With PTI inputs
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