Reserve Bank of India’s Governor Urjit Patel, who took over in September last year, said in an interview on Monday that Indian policy makers would not prioritize economic growth over the central bank’s inflation target.
Patel also said that the country’s economy is recovering even after a slowed growth to a three-year low of 5.7 percent in the April-June quarter. The aforementioned slowdown caused some sectors to request lower interest rates. However, with inflation rising, the RBI left interest rates untouched based on a review by the monetary policy committee (MPC) a week ago.
The MPC is the new architecture established after the Indian central bank got the green light for a flexible inflation targeting. It consists of six members, which are three each from RBI and the academic world. The committee’s task is to decide the trajectory of the country’s monetary policy.
“Growth is always there in the MPC’s scheme of things; we don’t lose sight of that, but not at the cost of inflation,” Patel said in the interview. “However, we have to be careful—we should aim at achieving the inflation target without losing sight of supporting economic growth.”
India’s central bank has disclosed before that it has a medium-term target for annual inflation of 4 percent, with a flexibility of plus/minus 2 percent intended for the volatility of food prices.
“If we breach those for three consecutive quarters, we need to inform the government of why that happened, and what we propose to do to bring inflation within the two bands,” Patel said.
According to Patel, the objective remains to have a 4 percent inflation target on a durable basis, although the band gives them a flexible inflation targeting mechanism.
When asked about the multiple views on the output gap, which is the difference between the actual output of the economy and its potential output, Patel remarked that it was natural.
“There will always be divergence of views on the output gap as it is unobservable in a rigorous direct sense. There are only estimates,” said Patel, citing this explanation as the reason why different views of “reasonable people” are necessary.
He said that the committee acknowledged the possibility of the widening of the output gap, although he also asserted that there was a need for more data in order to ascertain better “the transient versus sustained headwinds in the recent growth prints.”
“That is why the rate was unchanged. The MPC also made suggestions for the faster closure of the output gap,” Patel said.
When asked about the system’s excess in liquidity, he said that the excess was caused by a variety of well-known reasons. However, he added that “the liquidity overhang is tapering off.”
“Even during the most challenging times regarding liquidity over the past 12 months, the broad integrity of the monetary stance was maintained by RBI,” said Patel, referring to the neutral stance that the bank is taking in relation with the liquidity system.
The final question thrown at Patel in the interview was about the prospect of adding bankers or treasury managers at the MPC. He said that the members of the committee, specifically the three external members, have notable academic backgrounds.
“You must appreciate that the current government…has actually ceded powers by constituting an MPC with external members, and the GST council, where the center is not in the majority. These are two new important new institutions—one in the monetary policy space and the other in the fiscal space. Can we ask for more?” Patel said.
Overall, Patel insisted that the committee has “started seeing an upturn” in the economy.
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