‘Focus on 4% inflation target could’ve been disastrous’

MUMBAI: Reserve Bank of India (RBI) governor Shaktikanta Das on Friday refuted criticism of the RBI being behind the curve in its policies, making it clear that the consequences of focusing on the 4% inflation target would have been “disastrous” for the pandemic-hit economy.

In comments that came two days after former chief economic advisor Arvind Subramanian co-authored an article blaming the RBI for acting late on inflation and being behind the curve, Das said the central bank acted as per the evolving economic developments and also gave out a timeline of its actions to explain the shift.

“…tolerance of a higher inflation during the pandemic was a necessity, and we still stand by our decision,” Das said speaking at an event organised by Financial Express here.

He said the RBI switched into ultra-accommodation as soon as India went into the lockdown and shifted focus to inflation two years later in April 2022, when it saw that the gross domestic product (GDP) had gone beyond the pre-pandemic level.

Despite its accommodative policies, the economy contracted by 6.6% in FY21 and recovered to barely above the pre-pandemic levels in FY22, he said, stressing that a shift in policy management to focus on inflation even 3-4 months before April 2022 was not apt. “I feel that we are very much in line with the requirements of our time, the

RBI has acted proactively and I would not agree with any perception or any sort of description that the RBI has fallen behind the curve,” Das said.

Subramanian’s article blamed the RBI for being behind the curve, pointing out that the 4% inflation target has not been met since October 2019 and in 18 of the 32 months since then, the headline consumer price inflation has breached even the RBI’s ceiling of 6%. It also raised question marks over inflation forecasting.

Disclosing that he has not read the article and making it clear that he does not want to join any debate, Das said the RBI’s mandate is that of flexible inflation targeting where it is required to take care of both price rise and growth, especially so in extraordinary situations like a pandemic.

“If we had been very firm in maintaining 4% (inflation) and kept the rates unduly high, I’m sorry, the consequences of that approach would have been disastrous for the economy.

“If we had attempted to keep …monetary policy tighter at that time, the economic damage that you would have caused to our economy and to our financial markets would have been enormous and it would have taken years for India to come back,” Das noted.

According to the governor, the central bank was not optimistic with its FY23 inflation estimate of 4.5% made public ahead of the Russian invasion of Ukraine, which sent the oil prices rocketing.