RBI Not Behind Curve; Tighter Policy Would Have Been Disastrous: Governor

The Reserve Bank of India is not behind the curve on inflation, and "truly and sincerely" believe the central is in sync with the requirements of the economy, said Governor Shaktikanta Das at a banking event on Friday.

Refuting criticism of the RBI being behind the curve, Mr Das on Friday defended the policy actions, saying shifting focus to inflation management earlier would have had "disastrous" consequences to the economy.

The tolerance of high inflation during the pandemic was a necessity and we stand by our decision, because if we had adopted tighter policy, it would have been disastrous for the economy that contracted 6.6 pc in FY22, he said.

The central bank was in sync with the requirements of the economic developments, he said, adding the statutes governing the RBI clearly mention about managing inflation while being cognisant of the growth situation.

The RBI shifted focus to growth in the face of the pandemic and offered easy liquidity conditions. Despite that, the economy contracted 6.6 per cent in FY21, Das said, asking all about the consequences to growth in FY22 if the central bank had shifted its stance earlier.

It could not have shifted focus to fight inflation 3-4 months earlier as well, he made it clear.

"…the RBI has acted proactively and I would not agree with any perception or with 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?" he clarified.

On liquidity, he said all the measures taken by the RBI during the pandemic were with a sunset clause but factors beyond the central bank's control like the multiple waves of infections and the war have made the exit from easy liquidity measures longer.

The governor assured that an exit from the easy liquidity conditions will be smooth and there will be a "soft landing".

While India's retail inflation eased to 7.04 per cent in May from a year ago, after hitting an eight-year high in April, it has stayed well above the Reserve RBI's upper tolerance limit for the fifth consecutive month.

The Indian central bank last week projected price pressures to remain elevated and over its target band of 2-6 per cent for the rest of this calendar year, so, it would be too early to call a peak in inflation.

Indeed, the RBI, which factors in the CPI in its monetary policy, had earlier this month raised the inflation forecast for the current financial year to 6.7 per cent from its previous estimate of 5.7 per cent.

The government has mandated the central bank to keep retail inflation at 4 per cent, with a tolerance level of plus or minus 2 per cent of that rate, which is between 2 and 6 per cent.

With the inflation outlook elevated, the RBI was forced to hike its key rate for the first time in four years, lifting it by 40 basis points (bps) in an off-cycle meeting in May and a follow-up 50 basis points increase last week, taking the repo rate to 4.90 per cent.

The repo rate is the rate at which RBI lends money to commercial banks and the latest inflation data suggests interest rates are set to keep rising.

Mr Das said, India's central bank was confident of exiting from ultra-loose monetary policy smoothly and ensuring a soft landing for the economy. We "truly and sincerely" believes the RBI is in sync with the requirements of the economy.