MUMBAI: Amidst calls from central ministers for rate cut ahead of the next policy announcement on December 6, Reserve Bank governor Shaktikanta Das has said growth is a fundamental necessity for the Global South, but it cannot come at the cost of price stability, indicating that its too early for an easing cycle back home, where the rates have been kept unchanged since February 2023 at 6.50 per cent.
Addressing a high-level policy conference of central banks from the Global South in Mumbai on Thursday, Das speaking on 'Balancing inflation and growth: The cardinal principle of monetary policy', said to achieve higher growth, the countries in the Global South need to step up investment in physical and social infrastructure, leverage technology and innovation, and carry out institutional reforms.
“All these require congenial public policies, including monetary policies, to be growth supportive while maintaining balance with inflation,” Das, who is likely to get a historic third term after his six year term ends on December 12, said.
Das also said “price stability is just as crucial as growth to enable economic agents to plan ahead, reduce uncertainty and inflation risk premium, encourage savings and investment, all of which provide a boost to the potential growth rate of the economy.”
“Thus, in the long-run, price stability supports sustained high growth. Price stability is also important because high inflation is disproportionately burdensome on the poor,” Das added.
Emphasising on the importance of price stability for sustained economic growth, Das said the RBI is committed to bringing down retail inflation to 4 per cent on a durable basis. The retail price index overshot the upper band of the RBI tolerance level, crossing 6.21 per cent in October, after it ticked up to 5.65 per cent in the previous month. In July and August the price index was below 4 per cent at 3.5 and 3.65 per cent respectively.
Das highlighted that RBI’s focus is on anchoring inflation expectations and ensuring the effective transmission of past rate actions to the broader economy and underlined that price stability acts as a bedrock for sustained growth.
Noting that resilient growth has given the RBI the space to focus on inflation to ensure its durable descent to the 4 per cent target, he said “a stable inflation or price stability is in the best interest of people and the economy. It acts as a bedrock for sustained growth, enhances the purchasing power of people and provides a stable environment for investment."
The governor said when the RBI took a pause on the policy rate in April 2023 after raising it by 250 basis points, it was important to anchor market expectations from running ahead or front running the central bank. It is, therefore, emphasised that it was a pause and not a pivot. This was to ensure that past rate actions were transmitted fully to the broader economy, he said.
"We also categorically said it is not enough to be within the tolerance band and that our job is not finished until we reach the target of 4 per cent on a durable basis," the governor added.
Policymaking in this environment of heightened uncertainty is akin to driving a car through a foggy path ridden with speed bumps. These are conditions which will test the driver's patience and skill.
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, Das said.
For the countries of the Global South, maintaining overall stability which includes sustained growth, price stability and financial stability continues to be a daunting challenge, he emphasised.
Central banks need to work towards more robust, realistic and nimble policy frameworks that use monetary, prudential, fiscal and structural policies synergistically to achieve the desired outcomes, the governor said.