RBI Governor Defends Inflation Stance In Public Address Ahead Of Additional MPC Meet

Premature tightening of policy rates by the Reserve Bank of India would have been very costly for the country, according to Governor Shaktikanta Das.

The central bank is endeavouring to keep an "Arjun's eye," on inflation, Das said while speaking at a banking conference in Mumbai Wednesday, even as the country's retail inflation rate remained over 6% since January 2022 forcing it to conduct an additional meet.

The RBI governor used the mythical hero from the epic Mahabharata as an analogy to emphasise that the central bank's primary aim is to bring inflation under control.

The RBI's approach to tackle inflation has been the right one, Das said, even though there have been calls from some quarters that the central bank should have started tightening monetary policy much earlier.

The Covid-19 pandemic, Russia's invasion of Ukraine, and prevailing conditions in the financial markets have all been negative surprises that India has had to deal with, the governor said. Had the central bank started hiking rates earlier than it did, it could have proven very costly for citizens as economic growth could have slumped, he said.

"What you prevent in the process doesn't get the kind of appreciation that it should get. We prevented a complete downward turn of our economy," Das said. "If we had prematurely started tightening...it would have been very costly for the economy. It would have been very costly for the citizens of this country. We would have paid a hight cost."

While the RBI's initial projections showed that inflation would hover around 4.5% in 2022-23—even with elevated oil prices—but the Russia-Ukraine war upset the cart on those estimates, the governor said.

"We didn't want to upset the economy...we wanted the economy to safely reach the shores and thereafter try and pull down inflation," Das said, while outlining the central bank's thoughts before the conflict [Russia-Ukraine] began. But as crude, commodity, and food prices shot up globally after the conflict started, the inflation expectations shifted quickly.

The current environment has witnessed a slippage in the RBI's ability to keep inflation below 6%; the flip side of that argument also needs to be appreciated, Das said.

Monetary Policy Transparency

India's monetary policy committee is set to meet on Nov. 3 for an off-cycle meeting held under Section 45ZN of the RBI Act.

The section lays out the steps the central bank needs to take when it fails to meet the inflation target which include submitting a report to the central government explaining why the banking regulator failed and the remedial steps it proposes to take.

The meeting was announced by the RBI last week, and even though it raised speculation about whether the central bank would release the report to the public, Governor Das put it all to rest by stating that RBI doesn't have the mandate to release the letter to the public.

MPC resolutions are released since they are for the entire economy, but unlike that, the letter to the government is a report sent under a law, Das said. In due course though, the letter will be made public, he said.

Rupee vs Dollar & System Liquidity

"Currency movements following the war in Ukraine is more about India’s resilience and stability in the face of the unrelenting strengthening of the U.S. dollar rather than a story of weakness," Das said during the speech about the recent movements in the Indian rupee.

Although it is anyone's guess what the US Federal Reserve's terminal rate will be, once the tightening is over, India could see a resumption in inward capital flows, the governor said. "The rupee has seen a very orderly movement since the onset of the current geopolitical crisis."

Acknowledging that system liquidity dipped notably in October, the governor said that the dip was caused by elevated currency demand, tax-related outflows and the RBI's foreign exchange operations. "Episode of liquidity strain is likely to be transitory," Das said. Currency demand will slow down after the festival season, government expenditure will pick up, and forex outflows have moderated already, all of which will contribute towards easing the liquidity condition, he said.

"I would like to impress upon the banks and businesses to remain focussed on reinforcing their resilience while continuing to grow and meet market demand," Das said.