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‘Financial stability is a key theme for monetary policy’

Pulling out all stops: Mr. Das said the RBI would not hesitate to take required steps to maintain financial stability. Reuters

Pulling out all stops: Mr. Das said the RBI would not hesitate to take required steps to maintain financial stability. Reuters  

Price stability, the explicit mandate of monetary policy, may not be sufficient for financial stability: Das

With the liquidity crisis of non-banking finance companies (NBFCs) threatening to spillover to other sectors, Reserve Bank of India (RBI) governor Shaktikanta Das has highlighted the importance of the central bank’s role to maintain financial stability.

Speaking at the Lal Bahadur Shastri National Academy of Administration, Mussoorie, Mr. Das said while there is no explicit mandate of the monetary policy to maintain financial stability, that is the underlying theme.

He further said price stability, which is the explicit mandate of the RBI’s monetary policy, may not be sufficient for financial stability.

“Post the global financial crisis, it has been recognised that price stability may not be sufficient for financial stability and therefore financial stability has emerged as another key consideration for monetary policy, though the jury is still out as to whether it should be added as an explicit objective of monetary policy,” he said.

“The fact remains that though the focus of monetary policy is mainly on inflation and growth, the underlying theme has always been financial stability.”

Referring to the challenges faced by the shadow banks, Mr. Das reiterated that the RBI would not hesitate to take the required steps to maintain financial stability.

Commenting on the ‘primary objective of the monetary policy’ as per the amendment in the RBI Act in May 2016, Mr. Das said, “In a flexible inflation targeting framework, a delicate balance needs to be maintained between inflation and growth objectives.”

He said the endeavour of RBI is to ensure price stability under the flexible inflation targeting regime and simultaneously focus on growth when inflation is under control. In 2019, the RBI reduced the key interest rate, or repo rate, by 75 bps to 5.75% to boost economic growth, which fell to 5.8% in the January-March 2019 quarter, dragging down the full year growth to a five-year low of 6.8%.

He observed that in the recent period, there had been a loss of speed in the second half of 2018-19 as some drivers of growth, notably investment and exports, had slowed down. “On the supply side, activity in agriculture and manufacturing moderated sharply,” he added.

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Printable version | Jul 13, 2020 12:54:49 PM | https://www.thehindu.com/business/financial-stability-is-a-key-theme-for-monetary-policy/article28022501.ece

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