RBI Governor Shaktikanta Das Emphasizes Forward-Looking Monetary Policy

The Reserve Bank of India (RBI) Governor Shaktikanta Das has recently stressed the importance of a forward-looking monetary policy that can balance the objectives of growth and inflation in the current economic scenario. He also highlighted the challenges and opportunities that the Indian economy faces in the post-pandemic period .

The Need for a Forward-Looking Monetary Policy

In his speech at the 16th C.D. Deshmukh Memorial Lecture on September 7, 2023, Das said that the RBI’s monetary policy framework has been guided by a flexible inflation targeting (FIT) approach since 2016, which aims to maintain price stability while supporting growth. He said that the FIT approach has helped in anchoring inflation expectations and enhancing the credibility and transparency of the RBI.

However, he also acknowledged that the FIT approach has faced some challenges in the wake of the COVID-19 pandemic, which has caused unprecedented disruptions and uncertainties in the global and domestic economy. He said that the pandemic has posed a trade-off between growth and inflation, as the RBI had to adopt an accommodative stance to support the recovery of the economy, while also facing inflationary pressures due to supply shocks and rising commodity prices.

Das said that in order to deal with this trade-off, the RBI has adopted a forward-looking monetary policy that takes into account the evolving macroeconomic conditions and expectations. He said that the RBI has used various conventional and unconventional tools such as repo rate, reverse repo rate, open market operations, targeted long-term repo operations, and liquidity adjustment facility to provide adequate liquidity and credit support to various sectors of the economy. He also said that the RBI has communicated its policy stance and actions clearly and timely to the public and the markets.

Das said that the forward-looking monetary policy has helped in mitigating the adverse impact of the pandemic on the economy and facilitating a faster and stronger recovery. He said that the Indian economy is expected to grow by 9.5% in 2023-24, after contracting by 7.3% in 2022-23. He also said that the inflation rate is expected to moderate to 5.7% in 2023-24, after rising to 6.2% in 2022-23.

The Challenges and Opportunities for the Indian Economy

Das also outlined some of the challenges and opportunities that the Indian economy faces in the post-pandemic period. He said that some of the challenges include:

• The uncertainty and volatility in the global environment due to factors such as geopolitical tensions, trade disputes, climate change, and cyberattacks.
• The emergence of new variants of COVID-19 and their impact on public health and economic activity.
• The persistence of inflationary pressures due to supply-side constraints, rising input costs, and demand recovery.
• The stress in the financial sector due to rising non-performing assets, low credit growth, and weak profitability.
• The fiscal sustainability of the government due to high public debt and deficit levels.

He said that some of the opportunities include:

• The potential for higher growth due to favorable demographics, rising urbanization, digitalization, innovation, and entrepreneurship.
• The scope for enhancing productivity and competitiveness through structural reforms, infrastructure development, skill enhancement, and ease of doing business.
• The possibility for increasing domestic savings and investment through financial inclusion, financial literacy, and financial deepening.
• The opportunity for diversifying exports and enhancing external resilience through regional integration, market diversification, value addition, and quality improvement.

Das concluded his speech by saying that the RBI will continue to pursue a forward-looking monetary policy that can balance growth and inflation objectives while maintaining financial stability. He also urged all stakeholders to work together to overcome the challenges and seize the opportunities for building a more resilient and inclusive economy.