Mumbai: The Reserve Bank of India (RBI) governor Sanjay Malhotra said that given the uncertainty around the ongoing West Asia crisis, the monetary policy response has been to wait and watch, remain data dependent and respond as the inflation-growth dynamics evolve.
In a speech delivered at his alma mater, Princeton University, on Saturday (he speech was uploaded on the RBI website on Monday), Malhotra said that West Asia contributes about one-sixth of India’s exports, one-fifth of its imports, half of its crude oil imports, two-fifths of fertilisers imports and almost two fifths of its inward remittances.
“The appropriate monetary policy response to such a supply shock is to look through the first-round effect to the extent that it does not feed into second-round dynamics. Second-round effects are the real concern. They can materialise if the supply chain disruptions continue for long. Then, what began as a supply shock can become embedded in the general price level.”
He said preventing this entrenchment is where monetary policy has a primary role to play — through its influence on inflation expectations rather than through blunt demand compression.
He underscored the need for central banks to be agile and nimble, maintain a broad policy stance, and avoid making firm commitments of the future path of policy in such uncertain times.
“In such circumstances, our broad approach has been to be even more data dependent and to continuously reassess the balance of risks. We are therefore in wait and watch mode now. Moreover, we have been maintaining a neutral stance for the last few policy cycles. It preserves the flexibility to respond as the inflation-growth dynamics evolve,” said Malhotra.
He credited various policy initiatives such as the Flexible Inflation Targetting (FIT), fiscal monetary co-ordination, financial inclusion initiatives including Jan Dhan Programme, UPI that have facilitated India becoming the fastest growing economy in the world.
Malhtra said that in the last decade, India on an average grew by 6.1 per cent per year, whereas the global economy grew by 3.2 per cent and its nearest peers like China grew by 5.6 per cent and Indonesia by 4.2 per cent because of the various enablers which worked in the background creating a facilitating environment for the core factors to play out.
The RBI formally adopted price stability as the primary mandate in 2016 under the Flexible Inflation Targeting (FIT) framework with a target of (4 per cent) with a band of 2 per cent on either side. The framework has helped with “our average headline inflation dropping to 4.7 per cent (September 2016 to December 2025), down from 7.4 per cent in the years prior (April 2012 to August 2016).”
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