Inflation above 6 per cent would be detrimental to India's growth: RBI Governor Shaktikanta Das

Reserve Bank of India (RBI) Governor Shaktikanta Das said that inflation above 6 per cent would be detrimental to India's growth. Das made the remarks quoting an RBI internal research report. He said that inflation over 6 per cent for a prolonged period will be counterproductive for India because the financial savings and investment climate will be hit and the country will lose the confidence of international investors. According to the government's mandate to the RBI, the central bank is required to ensure that retail inflation remains at 4 per cent with a margin of 2 per cent on either side.

The inflation band of 2-6 per cent also provides RBI with enough policy space to use during times of stress, as was done during the COVID-19 pandemic. 

RBI Governor Shaktikanta Das on Saturday said there was no need to change the inflation target despite the central bank's failure to keep it below the 6 per cent upper tolerance level for 9 consecutive months while exuding confidence that the October print will be less than 7 per cent.

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Inflation has been trending above the RBI's upper tolerance level of 6 per cent since January this year. The Reserve Bank of India (RBI) Act mandates that in the case of the inflation target not being met for three consecutive quarters, the central bank has to submit a report to the government explaining the reasons and details of the remedial actions it will be taking to check the price rise.

Earlier this month, a special meeting of the Monetary Policy Committee (MPC) was held to finalise the report explaining the reasons for missing the inflation target for three quarters. This was the first time since the onset of the Monetary Policy Framework which came into effect in 2016 that the RBI explained its actions in a report to the government.

Speaking at the HT Leadership Summit on Saturday, Das said there is no need to change the goal post for inflation targeting as higher than 6 per cent inflation would hurt growth.

Although the inflation was about 5.5 per cent, the Monetary Policy Committee very consciously and quite rightly decided to tolerate higher inflation because during COVID-19 the priority was to support the economy by keeping liquidity easy by keeping the interest rates lower, he pointed out.

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"We should not think of shifting the goalpost because we have not been able to meet it. We remain committed to bringing the inflation down to 4 per cent over a period of time," he said.

Noting that internationally there is a debate on shifting the goalpost, he said it would be too early to enter into that discussion.

As per a notification issued on March 31, 2021, the central government retained the inflation target at 4 per cent (with an upper tolerance level of 6 per cent and the lower tolerance level of 2 per cent) for the five-year period April 1, 2021 to March 31, 2026.

Retail inflation in September increased to 7.4 per cent from 7 per cent in August on higher food and energy costs. "We expect the October number which will be released on Monday to be lower than 7 per cent. Inflation is a matter of concern with which we are now dealing and dealing effectively," he said.

For the last six or seven months, he said, both the RBI and government have taken a number of steps to tame the price rise. The RBI on its part increased the interest rates and the government also announced several supply-side measures, he added.

Talking about the economy, Das said India will continue to be the fastest-growing major economy with a likely growth rate of 7 per cent in 2022-23 on the back of strong macroeconomic fundamentals and financial sector stability. The country's economy remains resilient, supported by the banking and non-banking sectors, he added.

(With PTI inputs)