Reserve Bank of India (RBI) governor Shaktikanta Das, speaking at the Kautilya Economic Conclave organised by the Institute of Economic Growth and Ministry of Finance, says the policy repo rate hike of 250 bps between May 2022 and February 2023 is still working through the financial system. "We have also appropriately fine-tuned our communication to ensure successful transmission of the rate hikes," Das says while talking about "Price and Financial Stability: Managing Complementarities and Trade-Offs".
He says amid slowing growth and stubborn inflation globally, economic activity in India shows resilience to strong domestic demand. "Real GDP growth for 2023-24 is projected at 6.5% and India is poised to become the new growth engine of the world."
On inflation, the RBI Governor says the headline CPI inflation has moderated sharply to 5% in September 2023, with a correction in vegetable prices. "The outlook on food inflation, however, is beset with uncertainties. We have projected headline CPI inflation at 5.4 per cent for 2023-24." In the current situation, monetary policy must remain actively disinflationary to ensure that the ongoing disinflation process progresses smoothly, Das adds.
He primarily talked about price stability and financial stability during the lecture, saying that they complement each other. Price stability is an anchor for financial stability, and the RBI treats financial stability as "non-negotiable", he adds.
India has strengthened macroeconomic fundamentals and buffers, which has made the economy resilient to withstand large shocks and navigate in uncertain global settings, he adds.
Das says the global economy is facing a triad of challenges -- slow moderation in inflation interrupted by recurring and overlapping shocks; slowing growth with fresh and enhanced obstacles; and lurking risks of financial instability.
In such a situation, he says, conflict may arise between price requirements and financial stability, but policymakers have to "deftly tread a fine balance". "...it is important to recognise that price and financial stability reinforce each other in the medium to long term."
The Reserve Bank has the larger responsibility of maintaining financial stability, as it is the regulator and supervisor of banks and other financial sector entities and markets. Citing the steps taken in recent years to maintain financial stability, the RBI governor says.
This, he says, has enabled the central bank to focus on both financial and price stability, even during the recent overlapping shocks, including the ILFS crisis, COVID-19 pandemic, the war in Ukraine, unparalleled tightening of interest rates, and financial market volatilities.
