RBI had to ensure recovery took hold before acting on inflation, says Das

Central bank did not want to risk the costs to the economy and people of the country by tightening policy too early, asserts Governor; Russia’s war with Ukraine changed the picture, he adds

Updated - November 02, 2022 10:14 pm IST

Published - November 02, 2022 08:30 pm IST - Mumbai

Reserve Bank of India (RBI) Governor Shaktikanta Das addresses during the annual banking conference organised by Federation of Indian Chambers of Commerce & Industry (FICCI), in Mumbai, on November 2, 2022.

Reserve Bank of India (RBI) Governor Shaktikanta Das addresses during the annual banking conference organised by Federation of Indian Chambers of Commerce & Industry (FICCI), in Mumbai, on November 2, 2022. | Photo Credit: PTI

A day before writing to the government detailing reasons for the central bank’s protracted failure to keep inflation below 6% as mandated by law, RBI Governor Shaktikanta Das on Wednesday asserted that while there had been slippage in the inflation trajectory, any premature policy tightening could have proved costly for the economy and the people of India.

“We did not want to upset the process of recovery, we wanted the economy to safely land, reach the shores” before trying to pull down inflation, Mr. Das told bankers at FIBAC 2022, an annual banking conclave. “But February 24 [the day Russia invaded Ukraine] changed the entire picture,” he added.

Stating that the counterfactual also needed to be appreciated, he said, “In the process [of dealing with the challenges posed by the COVID-19 pandemic and war-induced imported inflation] there has been a slippage in our inflation trajectory to keep inflation below 6%, but it would have proved very costly for the economy, the citizens of this country. They would have paid a high cost,” he asserted.

“Today, I can say with confidence that the whole debate about RBI [being] behind the curve has ended. Today, as we stand, the growth momentum has sustained, inflation is expected to moderate, the financial sector is stable and resilient, the balance sheets of banks are looking robust, corporate sector balance sheet is also strong, the MSME sector has withstood the crisis and there has been credit offtake.” he added.

Emphasising that domestic inflation remained elevated, he said, RBI was closely monitoring the inflation trends as well as the effect of its past actions. “In our view, price stability, sustained growth and financial stability need not be mutually exclusive,” he said.

Drawing a parallel to Arjun’s concentration with RBI’s efforts to rein in inflation he said, “In the Mahabharata during the famous Swayamvara when the great warrior Arjuna aimed at the eye of the revolving fish through the pool of water below, he would have certainly assessed the speed at which the fish was revolving, the wind conditions, the intensity of the ripples in the pool of water, the noise levels in the King’s court and similar other factors”.

“No one can match the prowess of Arjuna, but our constant endeavour is to keep an Arjuna’s eye on inflation, which is our primary target,” he added. 

“I want to say very empathically that the monetary policy framework constituted in 2016 is very transparent and writing of the letter is very essential and a fundamental element of that transparency.” 

CBDC rollout in 2023

He said the Central Bank Digital Currency (CBDC) would be rolled out in 2023 after reviewing the pilots currently underway. 

He said the CBDC would be a landmark moment in the history of money and currency in the country. “Going forward, it is going to be a major transformation of the way business is done, the way transactions are conducted,” he added.

Observing that the RBI was among the few central banks in the world that had taken this initiative, he said the retail part of the CBDC pilot would be rolled out later this month.

Referring to the volatility in the exchange rate, Mr. Das said that almost all major currencies - barring the Swiss franc, the Singapore dollar, the Russian rouble and the Indonesian rupiah - had suffered depreciations in value against the U.S. dollar that had exceeded the depreciation experienced by the Indian rupee. 

“From April 1 to October 31, the Indian rupee has depreciated by 8%, while the U.S. dollar has appreciated by 13% [against a basket of 6 other currencies],” he observed.

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