RBI Guv calls for structural reforms and fiscal measures to boost growth

The Reserve Bank of India (RBI) has been focusing both on inflation and growth, but the macroeconomic situation plays a part in determining which one gets the priority, Governor Shaktikanta Das said on Friday.

“The relative emphasis on inflation and growth depends on the macroeconomic scenario, inflation and growth outlook, and signals emerging from incoming data,” Das said in a speech at his alma mater St Stephen’s College in New Delhi.

While the RBI has traditionally been concerned about inflation, and has now an expressed target to contain consumer price index (CPI) inflation between 2 per cent and 6 per cent, Das has repeatedly emphasised that RBI’s role in monetary policy under the 2016 amended Act is “to maintain price stability while keeping in mind the objective of growth”. 

Price stability is pursued, “while simultaneously focusing on growth when inflation is under control”, the RBI governor said in his speech.

The RBI conducts its monetary policy process in a forward-looking manner and effectively communicates its decisions to maintain inflation around its target and thereby support growth, Das said. He added the RBI has also been fine-tuning its operating procedures of monetary policy for effective policy transmission across the financial markets and thereby onto the real economy.

The central bank constantly updates its own assessment of the economy based on incoming data and survey-based forward-looking information juxtaposed with model-based estimates for policy formulation.

“This approach helped the RBI to use the policy space opened up by the expected moderation in inflation and act early, recognising the imminent slowdown before it was confirmed by data subsequently,” Das said.

The RBI cut rates by 135 basis points last year even as growth fell to a 10-year low in the second half of the fiscal year.

However, Das said that monetary policy has its own limits. Therefore, “structural reforms and fiscal measures may have to be continued and further activated to provide a durable push to demand and boost growth”.

Apart from pushing through some important growth drivers, the government’s focus on infrastructure spending “will augment growth potential of the economy”, Das said. “States should also play an important role by enhancing capital expenditure which has high multiplier effect.”

“Although global experience with financial stability as an added policy objective is still unsettled, the RBI has always been giving due importance to financial stability since the enactment of the Preamble to the RBI Act,” the governor said.

“More recently, the focus of financial stability has not only confined to regulation and supervision but also extended the reach of formal financial system to the unbanked and unserved population.”

The central bank is focused on promoting secured, seamless and real-time payments and settlements, he said.

“This renewed focus on financial inclusion and secured payments and settlements are not only aimed at promoting the confidence of general public in the domestic financial system but also improving the credibility of the monetary policy for price stability, inclusive growth and financial stability,” Das said.