Premature tightening would have upset recovery, says Das

The Governor’s explanation came a day ahead of the special Monetary Policy Committee’s (MPC) meeting on November 3 to decide on the content of the report the RBI has to send to the government after it failed to maintain the inflation target of 2-6 per cent for three consecutive quarters.

“Much has been made about the RBI not being able to adhere to inflation target, but I would request you to just step back for a moment and think if we had started the process of tightening earlier, what would have been the counterfactual scenario. What you prevent in the process, doesn’t get the kind of appreciation that it should get,” Das said.

“We prevented a complete downward turn of our economy. After recording a negative growth in the year 2020-21, India’s economy bounced back in 2021-22 and sustained in 2022-23 and also next year. How was it possible if we had prematurely started tightening?” Das said while addressing an event organised by Ficci and Indian Banks Association (IBA).

At the start of 2022, after looking at the inflation trajectory, the RBI’s assessment showed that the average CPI inflation during the year 2022-23 will be around 5 per cent. This projection factored in crude oil prices to be at $100 per barrel.

Even the professional forecasters had projected the inflation to be between 4.5-5.2 per cent, he said.

“So, we didn’t want to upset the process of recovery. We wanted the economy to safely land in the turbulent waters through which the economy had been sailing through the period of Covid. We wanted the economy to safely land on the shores, reach the shores and, thereafter, try and pull down inflation,” the Governor said.

But then on February 24, the Ukraine-Russia war started, which changed the entire picture as crude, commodity and food prices went up.

The consumer price based inflation (CPI), or retail inflation, has remained above 6 per cent between January and September 2022.

“In the process, there has been a slippage in our inflation targeting, in our ability to maintain inflation below 6 per cent. But it would have been very costly for the economy, the citizens of the country and we would have paid a high cost,” Das said.

He said after the war started in February, RBI, in its April monetary policy, started focusing on inflation and announced a number of measures. It also held an off-cycle monetary policy meeting in May in which it hiked the repo rate by 40 basis points for the first time in almost four years.

“We had to act and it was a negative surprise. But it was necessary and important to do. And because we did that, today I can say with confidence that this whole debate about the RBI behind the curve has ended and it is no more there,” Das stated.

Since May this year, the RBI has hiked the repo rate by 190 basis points to 5.90 per cent.

In today’s meeting, the MPC will decide on the content of the report it will send to the government.

In the report, the central bank will have to mention the remedial actions it proposes to take and an estimated time within which the inflation target will be achieved following the timely implementation of the proposed remedial actions. Following the MPC meeting, the RBI will send the report to the government.

Das reiterated that the RBI doesn’t have the privilege to release a report to the media which is being written as per the law.

“I don’t have the privilege, or the authority, or the luxury, to release it (the report) to the media before even the addressee gets it. The first right of receiving the letter lies with the government,” he added.

The Governor, however, said the content of the letter is not going to be perennially under wraps and will be available in the public domain at some point of time.