While Reserve Bank of India’s (RBI’s) monetary policy is primarily focused on inflation and growth, the underlying theme has always been financial stability, governor Shaktikanta Das said on Monday.
“In a flexible inflation targeting framework, a delicate balance needs to be maintained between inflation and growth objectives," Das said while delivering a speech on the ‘Evolving role of central banks’ at Mussoorie’s Lal Bahadur Shastri National Academy of Administration.
“The relative emphasis on inflation and growth depends on prevailing macroeconomic scenario, inflation and growth outlook, and signals emerging from incoming data." A copy of his speech is available on the central bank’s website.
Quoting the Reserve Bank of India Act, 1934, Das said that RBI plays its role “to regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in India".
Moreover, this role has been restated as per the amendment in the RBI Act in May 2016, according to which “the primary objective of the monetary policy is to maintain price stability, while keeping in mind the objective of growth".
According to him, after the global financial crisis, it has been recognized that price stability may not be sufficient for financial stability and, therefore, financial stability has emerged as another key consideration for monetary policy, though the jury is still out as to whether it should be added as an explicit objective of monetary policy.
The governor said even after more than a decade of the global financial crisis, and six years after the taper-tantrum, the global economy is still not on a stable growth path.
“Following an upward swing in 2017, there has been growing evidence that global growth and trade is weakening. Unsettled trade tensions and developments around Brexit are imparting further downside risks to the outlook," he said, adding that global trade is projected to expand at a moderate pace in the next two years in line with the subdued investment outlook for many major economies.
While the global economy is still to recover to the pre-crisis growth path, India has continued to exhibit robust growth driven by consumption and investment demand in the last three years, he said, adding that the county has, however, witnessed a loss of speed in the second half of 2018-19, with some drivers of growth, notably investment and exports, slowing.
“On the supply side, activity in agriculture and manufacturing moderated sharply. It is expected that the end of political uncertainty associated with an election season and continuation of economic reforms would lead to a reversal of the current weaknesses in some of the indicators in our economy," said Das.
The central bank, he said, has accorded high policy attention to reform both banking and non-banking sectors, and has been taking steps to strengthen the regulatory and supervisory frameworks to increase the resilience of the banking system.
“We are also giving a fresh look at their (NBFC’s) regulatory and supervisory framework. It is our endeavour to have an optimal level of regulation and supervision so that the NBFC sector is financially resilient and robust," Das added.