After forecasting inflation at 4.4 percent for the first quarter of next fiscal, why did the Reserve Bank of India Governor, Shaktikanta Das, sound stern in his fight against inflation? The answer probably lies on the other side of the coin.
Other than his commitment to bringing down to the 4 percent target for the Consumer Price Index, and the volatile food prices, Das was narrating about the second objective of the Flexible Inflation Targeting (FIT) – growth.
The central bank has forecast the Gross Domestic Product to expand 7.2 percent this fiscal. That is going gangbusters in a world where nations are willing to give an arm and a leg for even 5 percent growth.
“Without price stability, high growth cannot be sustained,” Das said in his address. “Especially, in a situation where the GDP is holding up well, we have decided to focus on inflation and ensure price stability.”
This is in contrast with what is happening in the rest of the world where expectations and even the central banks’ commentaries have taken a U turn in a matter of days or with just about one data point, especially in the US.
When the latest data showed a less than expected job creation in the US, the Federal Reserve Chairman Jerome Powell gave a forecast that triggered a market forecast of at least three interest rate reductions this year. And that is triple of what investors were expecting.
So was the case with the European Central Bank that was ahead of the US in reducing interest rates as Euro area economies have slowed substantially. The prospects of their economies slipping into recession is quite high.
But Indian growth story is different and that gives the RBI the elbow room to remain focussed on inflation because the threat of growth slowing is not even on the horizon.
On the contrary, from the central bank’s unstated perspective, the strong growth could be a cause of concern. Just a look at the regulatory measures to curb loan growth in various pockets tell a different story.
The RBI has been coming down with a heavy hand on unsecured retail loans. It raised capital requirements and punished some for being lax on following regulations. It is the less talked about financial stability mandate of the central bank that is at play.
Regulators, especially the RBI, after witnessing the banking sector drown in a tsunami of bad loans in the past decade and the monumental efforts to bring it back, would not want to see the repeat of it.
Prudential regulation is to prevent overheating of the economy which happens when loan growth is abnormal. There were years when loan growth averaged more than 25 percent during the so-called infrastructure boom. The country and the banking industry paid a heavy price for the irrational exuberance.
Even if the projected inflation is sliding to its target, its other aim – financial stability – could prevent it from turning easy on monetary policy. Especially, when the growth is resilient unlike in the US or Europe where predictions are for a recession, the RBI can keep a tight leash.
