DC Edit | Will RBI tweak inflation focus?
The appointment of Sanjay Malhotra as the new RBI governor continues the long-standing tradition of IAS officers heading the Central bank, a quasi-autonomous body that decides the country’s monetary policy. Of 26 governors who headed the Reserve Bank of India (RBI) since 1935, only eight were economists and 18 were ICS or IAS officials who served at the finance ministry.
Mr Malhotra took over the charge of RBI from Shaktikanta Das — the second longest serving governor after Sir Benegal Rama Rau’s stint of seven years and 197 days — at one of the most critical times in Indian history. He is faced with a difficult choice that almost all governors in the last 20 years have confronted — whether to focus on inflation or economic growth.
Some governors focused on economic growth in their belief that growth will ultimately take care of inflation. Some exclusively focused on keeping inflation under control because price rise will transmit faster and affect the poor. Under Shaktikanta Das, the RBI remained focused on fighting inflation, even if it meant sacrificing some economic growth.
The latest GDP data showed that India’s growth declined more than anticipated, which would warrant a nudge through boosting consumption by lowering interest rates. If RBI opts for easy monetary policy, it will have to deal with inflation — traditional nemesis — and strengthening of the dollar.
If the dollar turns attractive because of US President Donald Trump’s policy, India needs to keep interest rates elevated to maintain the interest rate arbitrage. Otherwise, the easy dollars that entered India will follow back, putting pressure on foreign exchange reserves.
Traditionally, people have unrealistically high expectations from RBI’s monetary policy. In a complex economy, the role of Central banks to either control inflation or boost economic growth has considerably diminished. Without a supportive fiscal policy, monetary policy alone cannot do much. One needs to, therefore, watch as to how Mr Malhotra will perform this balancing act.
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