 "RBI Governor Shaktikanta Das")
Consumer Price Index-based inflation, which has remained above the central bank’s 4 per cent target for three years, is likely to have fallen below 7 per cent in October, Reserve Bank of India Governor Shaktikanta Das said on Saturday.
“We have a major challenge with regard to inflation, but comparatively if you see our target, the upper ceiling is about 6 per cent. The last inflation number which was released for September show that the inflation was 7.4 per cent,” Das said at the HT Leadership Summit 2022.
“We expect the October number, which will be released on Monday, to be lower than 7 per cent. So, therefore, inflation is a matter of concern which we are now dealing (with) and dealing effectively,” he said.
Das also said that global inflation could cool down sooner than expected if international supply chains were restored, a phenomenon that would be shaped by the degree of intensity in the war between Russia and Ukraine.
Das’ comments come at a time when inflation has remained outside of the Monetary Policy Committee’s 2-6 tolerance band for three successive quarters, marking the panel’s failure to achieve its legally-mandated inflation target. On November 3, the MPC held a separate meeting to discuss and draft a report to be sent to the government regarding the failure on the inflation target.
“We have broadly explained the reasons on why it happened and I have spoken about it on several occasions. In Feb, when MPC met, our inflation projection was not different from what the professional forecasters were estimating. We projected in Feb this year that our average inflation in 2022-23 will be about 4.5 per cent.".
“In February, it looked that inflation is well under control and India is on course to reach the target of 4 per cent. But because of geopolitical crisis, there was sudden spike in commodity prices, cereal prices…we were impacted by the external factors and the entire inflation picture changed,” Das said, referring to Russia’s invasion of Ukraine in late February.
Das said that while there had been some debate about whether India required a higher inflation target, the current target made a lot of economic sense and one should not think of “shifting the goalpost”. In March, the government extended the MPC’s inflation target of 4 per cent for a period of 5 years.
According to the RBI Governor, the current tolerance band of 2-6 per cent offers enough flexibility for the rate-setting panel to use during times of stress such as the Covid-19 pandemic.
“Although the inflation was around 5-5.5 per cent (during Covid crisis), Monetary Policy Committee (MPC) very consciously and rightly decided to tolerate higher inflation because during Covid the priority was to support the economy by keeping liquidity easy, by keeping the interest rates lower,” he said.
“So far as India is concerned, I would say that we stand committed to the current target of 4 per cent, which makes lot of sense and gives us enough flexibility to deal with crisis situations and shocks.”
Amid queries regarding the volatility in rupee’s exchange rate this year, Das said that RBI’s interventions in foreign exchange market were decided on a daily basis while being driven by three principal objectives.
The first aim Das listed out was the RBI’s long-stated position of preventing excessive volatility in the exchange rate. The RBI’s foreign exchange reserves have reduced by more than $100 billion since the Ukraine war, partially due to the interventions in the currency market.
“At one point of time, there was no dollar supply in the market, it was only the Reserve Bank which was supplying the dollars…now, there were some observations made that RBI is using these reserves indiscriminately. It’s not so. We built up these reserves only for this rainy day and when it rains, I have said it earlier also, you have to pick up your umbrella and use it,” Das said.
The second aim of intervention was to anchor market expectations surrounding the depreciation or appreciation of the rupee, Das said, adding that sometimes if the RBI does not step into the market, currency traders take it as a sign that the central bank is agnostic to sharp moves in the exchange rate.
The third factor Das spoke about was overall financial stability, for which a stable exchange rate was a crucial prerequisite.
“That is the principal factor. Because if you have such disorderly movement of your currency, it will impact importers and exporters. It will impact investors and it will lead to kind of disruptions which ultimately will result in financial sector instability,” he said.
Speaking about digital lending practices, Das said that while he believed that the future belonged to technology, innovations in the financial technology space needed to be well-regulated.
