Monetary Policy’s Main Objective Is Inflation Control: Urjit Patel

Urjit Patel opened up about why the MPC shifted its stance from accommodative to neutral in its last policy meeting.

4 min read
Monetary Policy’s Main Objective Is Inflation Control: Urjit Patel

The Governor of the Reserve Bank of India, Urjit Patel, reiterated the reasons for why the Monetary Policy Committee shifted its stance from accommodative to neutral in its last policy meeting.

In an interview to television channel CNBC TV18, Patel repeated the MPC's assessment that core inflation has become stubborn and shows few signs of dropping below 5 percent.

He also repeated that he expects a sharp 'V' shaped recovery in the economy after the demonetisation effect and insisted there have been many benefits of demonetisation, including more transaparency.

Here are some of the key highlights of that conversation:


Shift From Accommodative To Neutral

Since we have committed to move closer to 4 percent inflation because of the legislated and notified mandate of the government, we needed to look beyond the headline number to see where the kind of disinflation that is needed to take us towards 4 percent would come from and the committee felt that inflation, excluding food and fuel, is something that has been stubborn since September-October and has shown little sign of coming decisively below 5 percent. That was the main reason why we had to look through the headline inflation.

The other reason is that the effects of the demonetisation and now, the remonetisation, also may impact some of the commodities where we have seen disinflation, but we do not know to what extent and for how long. It is most likely going to be short-lived.

For example, the disinflation in vegetable prices and therefore, the headline number, needed to be looked through keeping in mind that we need to get closer to 4 percent on a durable basis, but in a calibrated manner.

And that was the reason the MPC thought that we needed to have the flexibility going forward and therefore the shift of the stance from accommodative to neutral.

We also find that internationally commodity prices have firmed up, the international food price index has gone up, the base metal price index has gone up, crude prices continue to be in the mid-50s and staying there for some time given the data of the past few months.

So, the MPC noted that while inflation will be in the range of 4-4.5 percent in the first half of the next fiscal year, it then actually increases to 4.5-5 percent. That was one of the main reasons why we had to take the stance that we did, that while we will have some beneficial impact on inflation in the next few months, it then reverses itself mainly because inflation, excluding food and fuel, continues to be relatively high.

Recovery Post Demonetisation

Almost everyone agrees that the impact is going to be a sharp "V", that we would have a downgrade of growth for a short period of time.

However the remonetisation has happened at a fast pace and that was part of the plan that subsequent to the withdrawal of the specified bank notes our production plans and supply processes would ensure that the remonetisation happened as quickly as possible, which given our capacity in terms of printing currency notes is at a high level.


Objectives Of Demonetisation Met?

There were several objectives behind this. From the RBI side, the fake Indian currency note is an important issue that needed to be addressed. The other collateral benefits from this, in terms of greater accountability, better public finance, more transparency are by definition areas that take time to fully play out.

We have also had financial re-intermediation, in terms of greater financial savings going into deposits, mutual funds and insurance. So, there have been a fair number of benefits. Even the impetus given to digitisation should be beneficial going forward.

But, I think in all these supportive policies and more work is needed so that these benefits are not only tangible but are long-lasting and durable.


I think that in terms of remonetisation, we are proceeding at a pace that is very quick. Therefore we have managed to bring the situation to normal along most of the dimensions after demonetisation.

In a way, this was part of the plan that we would be printing the currency notes to full capacity from day one and we would reach a threshold point in this process when things do become more or less normal. So, that is again part of the good work that has been done.


Criticism Of The RBI

I think that it is important that one grows a thick skin fast in this business and I think we have done that. We have gone about our work, we had undertaken major challenges during these past few months and valid criticism is something that we are open for and we take it in the spirit in which it is given and try to improve ourselves.

The wider banking system has done a Herculean job over the last few months and over this period when there were many challenges. That is also important to keep in mind given the scope of the challenge, how far people worked to get over them.

(This piece was originally published on BloombergQuint)

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