RBI 'behind the curve' critique: Dy Guv says 'approach has served us well'

Addressing criticism of the RBI being "behind the curve" by continuing with the accommodative stance longer than other countries, Deputy Governor Michael Patra on Friday said "the approach has served us well".

India is placed "much better" to deal with future waves of the pandemic as compared to being affected the worst in the first after the nationwide lockdown, he said, expressing concerns on inflation being elevated due to crude prices.

It can be noted that the RBI has been critiqued in some quarters for being 'behind the curve' by holding on to its GDP growth-enhancing accommodative stance, even as the pressures on its core objective of inflation become evident and at a time when many of its peers have shifted to rate tightening. Those making such calls have been suggesting that the central bank shift its policy stance to neutral.

 

"Yes, there has been criticism that RBI has fallen behind the curve but only time will tell whether or not India got it right. So far, the approach has served us well and has helped in charting a course for ourselves into the future with a difference to the rest of the world, Patra said, delivering the 18th C D Deshmukh Memorial Lecture organised by Council for Social Development.

Patra said the slew of over 100 measures taken by the central bank since the onset of the pandemic, which included conventional ones like rate cuts and also unconventional ones, have contributed significantly in engineering a turnaround in the Indian economy.

Conceding that the impact of the measures is still unravelling, Patra said, "The overall state of the economy and of financial markets which is what these measures sought to address provides some evidence of the efficacy or otherwise of the RBI's pandemic response."

Patra said even before the start of the pandemic, the economy was already in a "cyclical downturn" with growth decelerating to a decadal low, which had forced the Monetary Policy Committee to turn accommodative in February 2019 itself and added that the central bank had already cut its key rates by a cumulative 1.35 per cent by February 2020.

Talking about first Covid wave and the world's preparedness to tackle it, he said, "If we had remembered, we would have prepared for the fact that influenza can evade pre-existing immunity by mutations. We would have recalled that infections occur in waves in the case of the 1918 influenza pandemic, up to four waves occurred, lasting up to 1920."

In hindsight, Patra said, "it is this loss of collective accumulated knowledge that allowed COVID-19 to catch us off-guard. In fact, this loss of memory resulted in irrational actions the declaration of COVID-19 as a pandemic by the World Health Organisation (WHO) on March 10, 2020 and India's nationwide lockdown that followed set off one of the biggest migrations in human history as people fled cities... This amnesia was global."

The GDP contracted by 24.2 per cent in the first quarter of FY21, which was among the deepest in the world, and the experience of the global financial crisis in 2008, where central banks led the fight, made the RBI swing into action, he said, adding that over 100 measures were taken to address stress at the system level and also in specific sectors.

I would not hazard the audacity of anticipating the judgment of history, but today, India is much better placed to deal with future waves of the pandemic relative to the first wave, Patra said, pointing out that the GDP is set to grow by 9.2 per cent in FY22 after a 7.3 per cent contraction in FY21, courtesy the exports growth.

In remarks that come at a time when oil prices touched a seven-year high of USD 90 a barrel, Patra said inflation is "elevated" on commodity prices, including crude prices, but also said that it has come off from the highs seen during the pandemic.

He said employment is yet to recover fully and labour force participation also remains low. Bank credit has begun to gain pace courtesy the easing of stress on lenders' balancesheets, but private consumption and investment are still work in progress, the RBI deputy governor said.

Restoration of livelihoods and the revival of MSMEs are formidable tasks that lie ahead, an optimistic Patra said, adding India is on course to become the fastest growing economy in the world.

Patra also pointed out that Governor Shaktikanta Das' 13 statements during the pandemic were the leitmotifs around which RBI's policy response was shaped and also termed them as instrument of policy in light of the central bank utilising its conventional options.

The RBI shuns the glare of the limelight but is ever ready to act, he said, adding that the central bank will learn the lessons from the pandemic and emerge more stronger and resilient to pursue the mandate of price stability while keeping in mind the objective of growth, Patra said.