Governor Shaktikanta Das on Friday refuted criticism of the RBI being behind the curve in its insurance policies, making it clear that the implications of specializing in the 4% inflation goal would have been “disastrous” for the pandemic-hit financial system.
In feedback that got here two days after former chief financial advisor Arvind Subramanian co-authored an article blaming the RBI for performing late on inflation and being behind the curve, Mr. Das stated the central financial institution acted as per the evolving financial developments.
“Tolerance of a higher inflation during the pandemic was a necessity, and we still stand by our decision,” Mr. Das stated talking at an occasion organised by Financial Express right here.
He stated the RBI switched into ultra-accommodation as quickly because the nation went into the lockdown and shifted focus to inflation two years later in April 2022, when it noticed that the GDP had gone past the pre-pandemic stage.
Despite its accommodative insurance policies, the financial system contracted by 6.6% in FY21 and recovered to barely above the pre-pandemic ranges in FY22, he stated, stressing {that a} shift in coverage administration to deal with inflation even 3-4 months earlier than April 2022 wouldn’t have been apt.
“I feel that we are very much in line with the requirements of our time, the RBI has acted proactively and I would not agree with any perception or any sort of description that the RBI has fallen behind the curve,” Mr. Das stated.
Mr. Subramanian’s article blamed the RBI for being behind the curve, declaring that the 4% inflation goal had not been met since October 2019 and in 18 of the 32 months since then, the headline client worth inflation had breached even the RBI’s ceiling of 6%. It additionally raised query marks over inflation forecasting.
Admitting that he had not learn the article and making it clear that he didn’t wish to be part of any debate, Mr. Das stated the RBI’s mandate is that of versatile inflation focusing on the place it’s required to care for each worth rise and progress, particularly so in extraordinary conditions like a pandemic.
“If we had been very firm in maintaining 4% (inflation) and kept the rates unduly high, I’m sorry, the consequences of that approach would have been disastrous for the economy.
“If we had tried to maintain …financial coverage tighter at the moment, the financial injury that you’d have brought on to our financial system and to our monetary markets would have been monumental and it will have taken years for India to return again,” he noted.
According to the Governor, the RBI was not optimistic with its FY23 inflation estimate of 4.5% made public ahead of the Russian invasion of Ukraine, which sent oil prices rocketing.
Mr. Das said in the estimate, the RBI had baked-in oil prices to be at $80 per barrel, and had decided to wait till the end of the fiscal to see the developments and take actions accordingly.
In March, the RBI saw that economic activity had surpassed the pre-pandemic levels of FY20 and also felt a clear pressure on price rise, which resulted in a shift in policy to help contain the persistent inflation, Mr. Das said, pointing out that measures initiated in the April review like the introduction of the standing deposit facility at a rate higher than the reverse repo were akin to a rate increase.
It could not be very strong in its rate increases and hence, waited till May to increase the repo rate by 40 basis points (bps) in the off-cycle meet and then the 50 bps increase delivered last week, he noted.
Seeking to highlight that the RBI was watchful of the inflation situation, the Governor said the central bank, which had initially decided to look through the higher CPI prints in the pandemic, dropped the word “transitory” from its commentary in August 2021 when it saw that inflation was persistent.
The RBI also focused on liquidity withdrawal after that, Mr. Das said, admitting that events beyond its control like the repeated waves of COVID infections and also the war had led to the exit from easy money policies taking longer than expected.
He, however, assured of a smooth exit from the ‘chakravyuh’ (labyrinth) of easy liquidity and added that it would be a “gentle touchdown”.
The Governor also said that the RBI had been able to pull out excess liquidity of more than ₹6 lakh crore through a slew of measures that it had carried out.
Asked about what was the neutral rate as per his understanding at present, Mr. Das said it was very difficult for him to pinpoint a number, but added that the negative interest rate situation in India was much better than in advanced economies.
Mr. Das said heading into the pandemic and lockdowns, the RBI’s focus was to support growth and ensure that the financial markets were functional and claimed success in both.
“Our focus was to make sure that the financial system reaches a stage the place we will pull out the help by way of liquidity and the help by way of decrease rates of interest…we needed progress to achieve a specific stage the place we have been snug that it was steady,” he burdened.
Source: www.thehindu.com
