Acting prematurely would have hurt economy, says RBI Governor Das

Shaktikanta Das defends timing of rate hikes amid failure to meet inflation target

The Reserve Bank of India may have failed to achieve its legally mandated inflation target but tightening policy too early would have been "very costly" for the economy, said Governor Shaktikanta Das Wednesday.

Das, who spoke a day before an additional meeting of the Monetary Policy Committee (MPC), said that efforts to safeguard growth often did not receive their deserved appreciation.

“Step back for a moment, pause for a moment, and think about…if we had started the process of tightening earlier, what would have been the counterfactual scenario? What you prevent in the process doesn’t get the kind of appreciation that it should get,” Das said at a banking event in Mumbai.

“In the process, yes, there has been a slippage in our inflation targeting, in our capacity to, in our ability to maintain inflation below 6 per cent, but it (premature tightening) 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 high cost. And I think that is something that needs to be appreciated,” he said.

Arguing that the RBI had prevented a complete slide in growth after GDP recorded a contraction in 2020-21, Das said that amid the public debate, history would judge the central bank’s actions.

“There are several points of view expressed, but it is our sincere and firm belief, and especially in the early part of this calendar year, in January-February, when we looked at the inflation trajectory, our assessment showed that the inflation during the year 22-23, that is the current financial year, the average inflation would be 4.5 per cent,” he said. CPI inflation was at 7.41 per cent in September 2022.

The MPC commenced on its current tightening cycle in May 2022. Since then, the repo rate has been raised by a total of 190 basis points to 5.90 per cent. CPI inflation has been above the RBI’s 4 per cent target for 36 months. The price gauge has also been outside of the MPC’s mandated 2-6 per cent range for three successive quarters, marking the rate-setting committee’s failure to achieve its inflation mandate.

Economic growth was at 13.5 per cent in April-June, lower than the RBI’s estimate of 16.2 per cent. The RBI last month reduced its GDP growth forecast for the current financial year by 20 bps to 7 per cent.

“We didn’t want to upset the process of recovery; we wanted the economy to safely land in the turbulent waters through which the economy had been sailing through the period of COVID. We wanted the economy to safely land on the shores and thereafter try and handle down inflation,” Das said.

“We are closely monitoring the inflation prints as well as the effects of our past actions. In our view, that is the Reserve Bank’s view and my view, price stability, sustained growth, and financial stability need not be mutually exclusive.”

Letter to government

Amid debate about whether the contents of the MPC’s letter on inflation failure to the government should be made public, Das reiterated that he did not have the privilege to release the statement as it was being made according to legal provisions.

The usual policy meetings of the MPC are meant for the entire economy, for financial markets and foe citizens of the country, but the same does not apply for the statement explaining why the MPC.

“In the case of the letter, which I write, which the Reserve Bank writes to the government, it’s a report sent under a law. I don’t have the privilege, the authority, or the luxury to release a letter like this, which is written under the law as per the legal requirement, I don’t have the privilege, authority or the luxury to release it to the media before even the addressee gets it,” he said.

Das said, however, that the contents of the letter would not be “perennially under wraps” and would be available to the public at some point.

“Our constant endeavour is to keep an Arjuna’s eye on inflation,” Das said, referring to the archery skills of the character from the Mahabharata.

While observing that liquidity conditions in the banking system had tightened in October due to a combination of factors including high currency demand in the festive season, Das said that the strain would likely be transitory.

According to the RBI governor, leakage due to currency demand would likely ease after the festival season and that government expenditure would likely pick up after the monsoon season. A key reason that has been cited by analysts for the recent tightness in liquidity is the slow pace of government spending. Moreover, the pace of foreign exchange outflows had moderated, which augurs well for systemic liquidity, he said.

Terming synchronous tightening by central banks as the latest global shock, Das said that the rupee had moved in an orderly fashion since the onset of the current geopolitical crisis. The rupee has depreciated 10 per cent against the US dollar so far in 2022.

Pointing out that in terms of the real effective exchange rate – which is inflation adjusted – the rupee had gained 3.7 per cent from March to September, Das said that the rupee was the least misaligned “in the face of tsunamis of global spillovers.”