He reiterated that the central bank’s pause in rates in the last two meetings in April and June was not a definitive change in policy direction. “Recognising that explicit guidance in a rate tightening cycle is inherently fraught with risks, the MPC has also eschewed from providing any future guidance on the timing and level of the terminal rate,” he said.
The RBI governor was delivering the opening plenary address titled ‘Central Banking in Uncertain Times: The Indian Experience’ organised by Central Banking, London.
Given India’s population and large addition to the work force every year because of the “demographic dividend”, RBI cannot be oblivious to growth concerns. “Hence, we prioritised growth during the pandemic years even as inflation remained above the target but within the tolerance band,” Das said pointing out that the Indian economy has displayed exemplary resilience postpandemic and rebounded strongly from a contraction of 5.8% in 2020-21 to a growth of 9.1% in 2021-22 and 7.2% in 2022-23.
Listing the key lessons of the post Covid years, Das said that being proactive and nimble footed during a crisis gave RBI the agility to respond speedily to evolving developments.
“Our measures have been prudent, targeted and calibrated to the need of the hour. We have not been tied down by any existing dogma or orthodoxy. While lowering the floor of the interest rate corridor and increasing its width, we did not inject excessive liquidity or dilute our collateral standards. We kept in mind that what is being rolled out needs to be rolled back in time and in a non-disruptive manner” Das said eluding to the post Covid liquidity measures by the RBI.
He mentioned effective communication as an important tool to provide guidance and confidence to the market and anchor expectations appropriately.
Das most of the RBI’s liquidity injection measures had pre-announced sunset clauses, which helped in an orderly unwinding of liquidity on their respective terminal dates without de-anchoring market expectations. “Overall, liquidity enhancing measures worth US$ 227 billion (8.7 per cent of GDP) were announced, of which funds availed were US$ 157.5 billion (6.0 per cent of GDP),” he said.
Das said in the last few years the central bank has focussed on strengrhening governance and supervisory systems and focussed on identifying and addressing the root causes of vulnerabilities in banks and financial entities rather than dealing with symptoms alone.
“Maintaining the stability of the Indian financial system is integral to our conduct of monetary policy as financial instabilities can undermine economic growth and impede monetary policy transmission. We recognize that the likelihood of financial turbulence would be high if there is no price stability,” Das said.
The central bank has gone from anchoring market expectations, during the pandemic to being calibrated and fine tuned in the subsequent tightening phase post April 2022 since when the RBI has hiked rates by 250 basis points, so as to ensure successful transmission of policy rate hikes.
“Communication has to be balanced – too much of it may confuse the market while too little may keep it guessing. Communication needs to be backed by commensurate actions to build credibility,” Das said.