“During Covid, the monetary policy committee consciously decided to tolerate inflation of more than 4% up to 6%. Had we been very firm on maintaining it at 4%, the consequence would have been disastrous for the economy. The economic damage would have been enormous and would take years for India to come back,” said the governor.
He added that under the RBI Act, the monetary policy committee determined the policy interest rate to maintain price stability while pursuing the objective of growth. Das was addressing a banking conclave in Mumbai. Tolerance of higher inflation has definitely contributed to the revival of the economy and put it in a much better position than many other countries, said Das.
The governor also refuted criticism that the RBI was behind the curve. “I truly and sincerely believe that the RBI is in sync with the requirements of the economy and the trend of economic developments and whatever you call the ‘curve’. ” The latest to criticise the RBI was former chief economic adviser Arvind Subramanian who co-authored an article which said that the RBI was behind the inflation curve and it was a failure of the institution and its guardrails. “Our focus was that the economy reaches a stage where we can pull out the support of liquidity and lower interest rate. We wanted growth to reach a level where it would be stable. As I mentioned in the policy, we did not want to rock the boat when it was close to the shore,” said Das.
“Questions have been asked whether our projection of inflation in February at 4. 5% was optimistic. We had assumed crude oil at $80 per barrel. Internally we found that even if crude hit $100, inflation would be 5-5. 2%. So, we took a conscious call to tolerate inflation for a little more time and wait until the end of March,” said Das. In April 2022, Das raised the floor rates in the money markets by bringing in a standing deposit facility that would pay a higher return to banks than the reverse repo (an instrument the RBI uses to borrow from banks). This made the reverse repo ineffective and turned the standing deposit facility (SDF) into the floor rate, and many saw it as monetary tightening by stealth to avoid unsettling the markets. Das confirmed that introducing the SDF was a tightening measure intended to increase the money market rates.
According to Das, even though the RBI had announced a host of liquidity measures after the 24% contraction of the economy during the first quarter of the pandemic, there was an end date to each of the measures.