Hasty withdrawal of easy policy can undo gains: RBI Guv Shaktikanta Das

Any hasty withdrawal from the present monetary policy accommodation can potentially undo all the gains that have been achieved after the devastating Covid-19 pandemic, Reserve Bank of India (RBI) Governor Shaktikanta Das told Business Standard in an exclusive interview.  

Inflation is showing signs of stickiness, but it is only a “transitory hump” that should moderate in the third quarter, he said. Therefore, the monetary policy committee (MPC) is more inclined to look through the perk-up in prices, as “growth is the main challenge” for now.

The governor said the RBI is still very watchful about the inflation scenario, but is taking comfort in the 2-6 per cent range allowed by the flexible inflation targeting regime. Ultimately, the aim of the central bank is to ensure that inflationary expectations remain firmly anchored at around 4 per cent. 

The governor is confident of his 9.5 per cent growth rate projection for this fiscal. “The second wave of Covid is behind us, and high-speed indicators point to a pick-up in economic activities, though it's a long shot to reach the pre-pandemic level of growth.” 

Notwithstanding the monetary policy tightening guidance given by the US Federal Reserve, India’s own monetary policy will be driven by domestic considerations, the governor said. 

India's foreign exchange reserves of $609 billion give adequate protection against any volatility, and should give protection to the domestic exchange rate. The reserves cover 15 months of imports, and are more than the country's overall external debt. With the reserves, there should be "no doubt in the market about India's capacity to deal with the situation of outflows," the governor said. 

However, the RBI is also mindful that the reserves are capital-flow driven. There is a liability created against the reserves and they have not been generated due to trade surpluses. 

Therefore, there is no question of using the reserves for any other purposes.

The governor was also candid enough to admit that the central bank does intervene in the offshore non-deliverable forwards market to quell volatility in the domestic exchange rate. 

Ultimately, the aim is that the offshore and onshore markets get integrated and price discovery happens in an efficient manner, he said.