Need to recognise global factors in inflation and policy coordination, says RBI governor

“Recent developments call for greater recognition of global factors in domestic inflation dynamics and macroeconomic developments which underscore the need for enhanced policy coordination and dialogue among countries to achieve better outcomes,” Das said while delivering a speech at an event organised by Institute of Economic Growth in New Delhi.

Around 77% of countries reported a rise in inflation in 2021 and this proportion is expected to rise further to 90% in 2022, according to the International Monetary Fund’s latest projections. Moreover, two-thirds of these countries are witnessing inflation above 7% against an inflation target of 2% for advanced economies, and an average target of about 3-5% for emerging market economies.

“While factors beyond our control may affect inflation in the short run, its trajectory over the medium-term is determined by monetary policy,” Das said. “Therefore, monetary policy must take timely actions to anchor inflation and inflation expectations so as to place the economy on a strong and sustainable growth pedestal. We will continue to calibrate our policies with the overarching goal of preserving and fostering macroeconomic stability,” he added.

He reiterated that RBI endeavors to bring down the inflation closer to the target of 4% with a moderate slowdown to output growth even when the fear of the US economy slipping into recession looms large due to monetary tightening.

“Not all episodes of tightening have ended in recession,” he reasoned, citing that revisions in GDP projections by major central banks and multilateral agencies in June 2022 indicated a loss of pace in economic growth rather than a loss of level.

“With front-loaded monetary policy actions underway, central banks may not face the need for prolonged actions that lead to recessions,” he said,

Central banks have begun delivering bigger and quicker policy rate hikes to restore price stability, even as the global economy is struggling to recover fully from the scars inflicted by the COVID-19 pandemic.

The persistence of inflation at elevated levels has also raised the debate as to whether the monetary tightening to contain inflation will end in global recession or will the policy makers be able to manage soft landing, which is a moderation in inflation closer to targets with only a moderate slowdown in output growth.

He said that any policy tightening at this juncture would have been detrimental to growth and extracted heavy social costs without being effective in containing inflation pressures.

The global factors present difficult policy trade-offs between price stability and stabilising economic activity, especially when the economy is recuperating from repeated shocks, the governor said.