Mumbai: Price stability is just as crucial as growth to reduce uncertainty and encourage savings and investment, which in turn would boost economic growth, India’s central bank chief insisted.
Stable inflation or price stability is in the best interest of the people and the economy as it acts as a bedrock for sustained growth, enhances people’s purchasing power, and provides a stable environment for investment, Reserve Bank of India governor Shaktikanta Das said.
He was addressing the ‘High-Level Policy Conference of Central Banks from the Global South’ on Thursday. His speech was titled ‘Balancing inflation and growth: The cardinal principle of monetary policy’.
Das’s comments follow public calls by key Union ministers for lowering interest rates to spur economic growth. RBI has maintained its key policy rate at 6.5% since February 2023, and hopes of the central bank lowering the rate diminished as October’s retail inflation came in at a 14-month high.
On Wednesday, the RBI Bulletin’s ‘State of the Economy’ report said retail inflation in October, based on the consumer price index, had turned out to be a “sticker shock after the wake-up call of September’s spike”, reinforcing the central bank’s warnings on complacency due to sub-target outcomes for July and August.
“What is worrying is that apart from the sharp surge in the momentum of food prices, core inflation has edged up,” the report said. It added that early signs were evident of second-order or spillover effects of high primary food prices owing to higher prices of edible oils, processed food, and household services such as wages of domestic helps and cooks.
“Inflation is already biting into urban consumption demand and corporates’ earnings and capex. If allowed to run unchecked, it can undermine the prospects of the real economy, especially industry and exports,” the RBI report added.
Insisting that price stability supports sustained economic growth, Das in his speech said price stability was important also because high inflation tends to be disproportionately burdensome on the poor.
While resilient economic growth has allowed RBI to focus on taming inflation, countries in the Global South need to step up investment in physical and social infrastructure, leverage technology and innovations, and carry out institutional reforms, Das said. The Global South is a vague geopolitical concept, including India, China, Australia and some West Asian nations.
All these require congenial public policies, including monetary policy, to be growth-supportive, while maintaining balance with inflation, he added.
Das highlighted the crucial role of the flexible inflation targetting framework, and fiscal-monetary co-ordination to balance growth and supply-driven inflationary challenges.
“This is very important for countries of the Global South, which have a significant share of low-income population with large developmental needs. They are most vulnerable to supply shocks, needing fiscal support which puts further burden on the limited budgetary resources of these countries,” he said.
Das also emphasised the need for effective monetary policy communication by central banks, especially in the Global South, given these economies’ transition towards establishing more independent central banks.
Higher exposure to large swings in capital flows, exchange rates and commodity prices warrants effective communication “as it obviates the need for large or frequent policy changes, or even any changes at all, if the inflation expectations are well anchored through appropriate communication”, he added. “Overall, effective communication in sync with the conduct, stance and goals of policy would contribute to fostering macro-economic stability.”
Das also highlighted the need for timing monetary policy decisions given that central banks are often “accused of doing too little, too late or too much, too early”. Central banks should have a correct assessment or at least endeavour to have a correct assessment of the current and expected situation or the outlook to suitably time their decisions, he said.
“Policymaking in this environment of heightened uncertainty is akin to driving a car through a foggy path ridden with speedbumps. These are conditions which will test the driver’s patience and skill,” Das said.
“Historical regularities are looking improbable, and policymakers are being put to test. When the history of our times is written, the experiences and learnings of the last few years will, in all probability, be a turning point in the evolution of central banking.”
