The monetary policy committee’s decision to tolerate higher inflation was one of the factors that contributed to the revival of economy, the central bank governor said.
RBI Governor Shaktikanta Das (File image)
The Reserve Bank of India (RBI) has not fallen behind the curve in terms of raising interest rates and is in sync with the realities of growth and inflation, the central bank governor said on June 17.
“I would not agree with any perception or any sort of description that the RBI has fallen behind the curve. Just imagine if we had started increasing the rates early, what would have happened to growth? This is all hindsight knowledge,” Shaktikanta Das said at an event in Mumbai.
“Could it (early rate hike) have prevented the spike in inflation caused by the war? No. Inflation would still have been at 7 percent.”
The RBI is in sync with the requirements of the economy, the trend of economic development and process of economic recovery, he added.
The RBI-led Monetary Policy Committee has raised the repo rate by a total of 90 basis points in May and June, with an aim to combat inflationary pressures in the economy. Prior to the May rate hike, the repo rate stood at a historical low of 4 percent for two years to help the economy revive from the Covid pandemic. The RBI had also infused sufficient liquidity in the system then.
However, inflation has posed a challenge of late. Retail inflation in India came in at 7.04 percent in May, easing from a near-eight-year high of 7.79 percent in April. Retail inflation has now been above the RBI’s medium-term target of 4 percent for 32 consecutive months. More worryingly, it has now spent five months above the 6 percent upper bound of the 2-6 percent tolerance range.
“I think it was the monetary policy committee’s decision to tolerate higher inflation, definitely, among other factors contributed to the revival of economy and took it to a place where we are today,” Das said today. “India is much better placed than many other economies to face the fallout of the war.”
The shock that the Russia-Ukraine war posed had to be dealt in a calibrated manner, Das added, explaining the rationale of the offcycle rate hike in May.
The priority remains to bring inflation closer to target, Das said. The central bank is also targeting a “soft landing” of liquidity withdrawal, he said.
