 "shaktikanta das, rbi")
Reserve Bank of India Governor Shaktikanta Das flagged the risk of a possible loss of the credibility of monetary policy from recurring incidences of large and overlapping supply shocks that stroke inflation. He reiterated that the monetary policy needs to stay alert and act when necessary.
“Recurring incidences of large and overlapping supply-side shocks bring with them the risks of generalisation of inflation impulses, possible loss of monetary policy credibility and de-anchoring of inflation expectations,” he said in the monetary policy committee (MPC) meeting minutes. Das said the fundamental goal was to align inflation with the 4 per cent target and anchor inflation expectations.
Observing that inflation expectations of households — both three months and a year ahead — have moved together to single digit for the first time since the Covid-19 pandemic, Das said monetary policy must remain actively disinflationary to ensure that the ongoing disinflation process progresses smoothly.
Deputy Governor Michael Patra emphasised growth cannot sustain without price stability as the benefits of expanding GDP and employment will be frittered away by the erosion of purchasing power.
“Within the dual mandate given to the MPC by the RBI Act, price stability is accorded primacy. Only when price stability is secured on an enduring basis against all threats to it can attention turn to the objective of growth,” Patra said.
He said inflation prints for September and October needed to be monitored carefully to look out for the moderation that the RBI projections anticipate. Retail headline inflation eased to 5.02 per cent in September, from 6.83 per cent in August.
More From This Section
“If we tame inflation durably, we will prepare the ground for a long innings of strong and stable growth. Our projections anticipate that growth will gather positive momentum from the second quarter onwards,” Patra said, adding monetary policy can contribute by remaining sufficiently disinflationary without being overly restraining.
Another internal member Rajiv Ranjan, who is the executive director in-charge of monetary policy, also talked about the need to be watchful on external shocks. “…we need to guard against risks from recurring weather related events and rise in global energy prices,” Ranjan said, while adding if the RBI projection for inflation which is expected to moderate inflation to 5.2 per cent in Q4 2023-24 and further to 4.3 per cent in Q4 2024-25, then the alignment of inflation to the target could be underway.
Jayanth Varma, the external member who was the only one who voted against the withdrawal of accommodation stance, said: “Successive meetings that promise to withdraw accommodation while actually keeping rates unchanged do not enhance the MPC’s credibility.”
“I would much prefer a stance in which words are consistent with the actions. Moreover, at this point of time, the guidance that the market really needs is not about how high the terminal repo rate would be, but about how long the rate would be maintained at a high level,” Varma said.
He said it would be useful for the MPC to communicate its intention to keep real interest rates high enough for as long as is necessary to drive projected inflation close to the 4 per cent target on a sustainable basis.
Another external member Ashima Goyal said there were signs of a revival in investment now after more than a decade, which needs to be sustained.
“Sharp financial tightening in 2011 and 2017 punctured such past revivals and led to persistent slowdowns. So it is important to ensure a sustained and sustainable revival this time. There is no excess lending or an infrastructure boom this time, but a healthy gradual rise,” she said.
Goyal cautioned about a sudden rise in India’s household debt and suggested policy measures like increasing risk weight for banks rather than raising interest rates to control exuberance.
“Indian household debt is low by international standards, but a sudden rise can be a concern. It is best to restrain over-enthusiasm in good times and thus avoid a crash. Prudential tightening, such as raising loan-to-value ratios or risk weights, would be preferable to raising policy rates more,” she said.
Commenting on the rise in household financial liabilities that increased from 3.8 per cent of GDP in 2021-22 to 5.8 per cent of GDP in 2022-23, by a similar 2.1 per cent fall in net financial savings, she said the rise in financial liabilities implies an increase in household physical investment and shows the interest sensitivity of demand in India, with a youthful population borrowing to acquire asset.
“We need to wait and see if the share of financial savings rises again after post-pandemic disturbances. As investment and income rises, savings also tend to rise. Already in Q4 FY23 net financial savings rose to 7 per cent of GDP from 4 per cent of GDP in Q3 FY23,” Goyal said.
