Home >Industry >Banking >Patel defends change in monetary policy as RBI looks beyond headline inflation

Mumbai: The monetary policy stance was changed to neutral from accommodative as inflation showed little signs of going “decisively" below 5%, said Reserve Bank of India (RBI) governor Urjit Patel, in an interview with CNBC TV-18, aired on Friday.

Owing to the stubborn nature of the inflation figure, the central bank had to look beyond the headline number, he added.

“We have been mandated by the government backed by legislation that we have to have an inflation target of about 4%," Patel said, defending the decision to shift the monetary policy stance.

On 8 February, the RBI announced that it will hold the repo rate at 6.25%, while changing its stance to neutral from an accommodative one. This was a surprise for most market watchers who were expecting a 25 basis points (bps) rate cut, due to easy inflation conditions. One bps is one-hundredth of a percentage point.

According to the governor, the RBI along with the rest of the monetary policy committee looked at various components of the headline inflation number to see which component needed concerted action so that the mandated target can be met.

“...that is our main objective in terms of the policy of the central bank which is now determined by the monetary policy committee," he said.

A neutral stance gives the RBI the needed flexibility to either hold rates, cut them or raise them depending on what is needed to achieve the inflation target, Patel said.

“I think it is a very important milestone in our economic history that the monetary policy is now determined through a committee process where there are both independent committee members and representation from the RBI," the RBI governor said.

It is pertinent to note that all six members of the monetary policy committee have always given a unilateral vote in the three monetary policy decisions that the committee has taken.

While speaking on the impact of demonetisation, the banking sector regulator said that owing to the speed with which the central bank has been able to replenish the economy with new currency notes, any negative impact on growth would be shortlived.

In his interview, Patel pointed out that the benefits arising out of the demonetisation exercise such as greater accountability, better public finance and more transparency are areas that would take some time to fully play out. Dealing with counterfeit currency notes was also a major issue that has been addressed through the exercise, he said.

Some of the other benefits include higher savings in financial products such as deposits, insurance and mutual funds and increased impetus on digitisation, he added.

“I think in all these supportive policies more work is needed so that these benefits are not only tangible but are long lasting and durable," Patel said.

Globally, the lack of clearly enunciated economic policies from large economies is a major worry, the RBI governor said. A lack of clarity may lead to financial volatility which will affect other countries, he added. Another major worry is the hardening prices of internationally traded commodities which may feed into inflation even domestically.

Just as most economists are expecting the world to grow at a higher rate in 2017, as compared with 2016, the RBI expects India to do better in the financial year starting 1 April.

“If very fundamental reforms take place, especially when it comes to factors of production like land, labour, then a higher growth rate is possible. Now, how much higher than the 7.5% that we are achieving so far is difficult to say. But the fact is we did grow at some point, faster than where we are now, but it could very well be that that was unsustainable and this is sustainable. So, 7.5% growth rate is not something to be disappointed," Patel said.

Speaking on the media’s treatment of the RBI and the perception that it did not do enough to manage the demonetisation exercise well and that the regulator had lost some of its autonomy, Patel said that the regulator was open to valid criticism and took it in the spirit in which it is given.

“I think that it is important that one grows a thick skin fast in this business and I think we have done that," Patel said.

“But, everyone also agrees that not only the RBI, but the wider banking system has done a Herculean job over the last few months and over this period when there were many challenges," he added.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our App Now!!

Edit Profile
My ReadsRedeem a Gift CardLogout