Targeting 'soft landing' for economy: RBI governor Shaktikanta Das

Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday said the central bank has been targeting a soft landing for the economy, at a time when soaring inflationary pressure has necessitated domestic monetary tightening.

“We are targeting a soft landing,” Das said at a media event on Friday.

He countered arguments that the central bank should have acted early to tackle the price rise and that it was behind the curve. Das said that acting early by raising rates could have been counterproductive for growth as the economy was reeling from the pandemic.

“Just imagine, if we had started increasing the rates early, what would have happened to growth,” Das said. “The RBI has acted proactively and I would not agree with any perception that the RBI has fallen behind the curve.”

Das emphasised that the RBI’s actions have been in sync with the requirements of the economy.

He pointed out that the central bank had turned its focus to liquidity withdrawal as early as August 2021 when it realised that inflation was becoming persistent.

The RBI governor made the comments amid a spate of recent criticism. These include the views of former chief economic adviser Arvind Subramanian, who said the central bank was late to respond to inflation risks.

Inflation as measured by the Consumer Price Index (CPI) printed at 7.04 per cent in May.

While the consumer price gauge eased from a near-eight-year high of 7.79 per cent in April, retail inflation remained well above the RBI’s mandated band of 2-6 per cent for the first five months of 2022.

A surge in global commodity prices, particularly crude oil, since Russia’s invasion of Ukraine in late February, have significantly increased upside risks to India’s inflation. Das said that the conflict had come “without any forward guidance or advance notice.”

Countering suggestions that the RBI should have embarked on a tightening cycle before it announced a surprise rate hike on May 4, Das expressed doubt over whether such action would have helped rein in inflation. “I mean, rhetorically I can say...that it could have prevented the spike in inflation which has now been caused by the war? No. Inflation would still be at 7 per cent,” he said.

Following a 40-basis-point rate hike on May 4, the RBI’s Monetary Policy Committee announced a 50-basis-point hike in the repo rate on June 8.

Das said that while the RBI had left the benchmark policy rate unchanged in the April monetary policy statement, the central bank had initiated a move towards higher money market rates by setting a higher rate for the Standing Deposit Facility (SDF).

In April, the central bank launched the SDF, replacing the reverse repo rate as the lower band of the liquidity adjustment facility corridor. In April, the SDF rate was set at 3.75 per cent, 40 bps higher than the reverse repo rate.

Acknowledging that the RBI had chosen to tolerate episodes of high inflation during the pandemic, Das staunchly defended the central bank’s decision. He said that if rates had been raised prematurely, the economic consequences would have been detrimental.

India’s GDP grew at 4.1 per cent in the January-March period, the slowest in a year. The GDP growth for the previous financial year as a whole was pegged at 8.7 per cent.

“If we had been very firm in maintaining 4 per cent and kept the rates unduly high, the consequences of that approach would have been disastrous for the economy. And, it would have taken years for India to come back,” Das said.