Need unambiguous, clear focus on inflation: RBI Governor Shaktikanta Das

Guv says RBI's target is inflation, not a neutral rate of interest

The Reserve Bank of India (RBI) needs to focus “clearly” and “unambiguously” on inflation, especially amidst sustained economic growth, RBI Governor Shaktikanta Das said on Friday.

“…our target is inflation and we are supposed to keep growth in mind”, Das said while speaking at the Financial Express Modern BFSI Summit.

“We monitor the growth numbers very carefully and I have said it on a number of occasions that the RBI Act mandates the central bank to maintain price stability (maintaining inflation at 4 per cent), keeping in mind the objective of growth. So, in all our monetary policy decisions, the growth aspect is always kept in mind,” he said. Das underscored that economic growth in the country has been robust, with an average growth rate of 8.3 percent over the last three years.

 

“This year our projection is 7.2 per cent and we are optimistic that 7.2 per cent will be achieved. In fact, we believe the April–June quarter growth has been 7.4 per cent. And growth momentum in Q2 continues to be strong. So, growth is holding steady hence we have to focus clearly and unambiguously on inflation”, Das said.

The domestic-rate setting panel has kept the repo rate unchanged at 6.50 per cent since February 2023 in order to achieve the 4 per cent inflation target on a durable basis.

Commenting on the neutral rate of interest. Das said, “Earlier, the neutral rate was pegged at 0.8 – 1 per cent, immediately in the aftermath of the pandemic when potential growth was low. Now that Covid is well behind us, the potential growth has gone up and the neutral rate of interest is pegged in the range of 1.4 – 1.9 per cent. So, even if we were to argue that the real rates are high, it is not so”.

He said RBI’s target is inflation and not a neutral rate of interest.

Responding to a question on allowing business houses to get into banking, Das said, “What India needs is not proliferation in the number of banks but sound, healthy, and well governed banks”. “Experience world over has shown that real sector companies when they enter the banking space, there are potential conflicts of interest and also there are issues related to related party transactions. It will be very difficult to monitor or prevent the related party transactions. So, the risks involved are very high”, he added.

However, he highlighted that RBI is open to receiving new applications for setting up universal banks. “I am not implying for a moment that the number of banks present is enough and no more licenses will be granted. All I am saying is that, if applications are received, we will take a call”, he said.

The RBI governor reiterated his concerns about the sluggish growth in deposits, highlighting potential risks to the financial system from structural liquidity issues. “While there could be a debate regarding ‘deposits funding loans’ vis-à-vis ‘loans funding deposits’, the current regulatory concern stems from the fact that there could be structural changes happening which banks need to recognise and, accordingly, devise their strategies”, Das said, adding that with credit growth remaining strong, banks need to continuously focus on improving and refining their credit underwriting standards and pricing of risks.

He also highlighted the worrying rise in digital frauds, particularly those involving mule bank accounts. Banks need to strengthen their customer onboarding and transaction monitoring systems to monitor unscrupulous activities, including suspicious and unusual transactions. This also requires effective co-ordination with the Law Enforcement Agencies so that the concerns occurring at a systemic level are detected and curbed in time, Das said.

“The Reserve Bank is working with banks and Law Enforcement Agencies to strengthen transaction monitoring systems and ensure sharing of best practices for control of mule accounts and prevention of digital frauds”, he added.

He also commented on the rise in the unsecured portfolios of banks and non-bank financing companies. He highlighted that since November 2023, when risk weights for such loans were increased to prevent excessive risk accumulation, there has been a noticeable moderation in these targeted segments.

“It needs to be emphasised that the delinquency levels and leverage in small ticket consumer loans warrant enhanced vigil. Matters such as fixing limits on unsecured exposures are left to the boards of banks and NBFCs. While it is not our intention to be prescriptive on such matters, banks and NBFCs are expected to show prudence and avoid exuberance”, Das said.

Governor Das acknowledged the challenge posed by climate change to economic growth. He said that the RBI is drafting strategies to tackle climate-related risks and provide climate financing. However, he cautioned against the risk of green-washing and emphasised the need for vigilance in this area.

Answering a question, he said that the government has experienced a smooth relationship with the RBI during his nearly six-year term, crediting close coordination between the two for the swift economic recovery after the pandemic.

"I am saying this from my experience. Nobody expects RBI to be a cheerleader. I have had no such experience," he added.