Shaktikanta Das, the Governor of the Reserve Bank of India (RBI), said on Tuesday that monetary policy must be forward-looking. He warned that taking a policy approach that only looks at the past can lead to problems. Das used the analogy of driving a car on a road with potential hazards to illustrate his point. He said that the driver must be able to see ahead and adjust the speed of the car accordingly. If the driver reacts too late to a speed bump, they could cause an accident.
“The conduct of monetary policy is like driving a car on the road with potential ditches and speed bumps. In other words, monetary policy has to be forward looking as rear-view mirror can lead to policy errors,” said RBI Governor Shaktikanta Das during the Delhi School Of Economics Diamond Jubilee Distinguished Lecture.
The RBI has been raising interest rates in an effort to combat inflation, which has been running above the central bank’s target of 4% for several months. The repo rate, which is the rate at which the RBI lends money to banks, has been increased by 250 basis points since May 2022.
The RBI’s Monetary Policy Committee (MPC) has a mandate to keep retail inflation within a target range of 2-6%. In recent months, inflation has been driven by rising food and fuel prices.
Das said that the RBI will continue to take steps to bring inflation under control, but that it will also need to be mindful of the impact of its policies on economic growth.
Inflation in India has been easing so far this year, but it has not yet shown a consistent downward trend. In July, the headline retail inflation rate rose to 7.44%, the highest level in 15 months, due to a sharp increase in vegetable prices.
S&P Global Ratings Economist Vishrut Rana said that inflation is likely to remain elevated in the near term, but government policies will prevent it from rising further. He noted that the government has taken steps to increase the supply of food and other essential commodities, which will help to cool prices.
Reserve Bank of India (RBI) Governor Shaktikanta Das said that the RBI is closely monitoring inflation and will take appropriate action to ensure that it remains under control. He also said that the RBI is working with the government to address the supply-side constraints that are contributing to inflation.
The RBI has raised interest rates three times this year in an effort to cool inflation. However, Das has said that the RBI will not raise rates aggressively, as it does not want to hurt economic growth.
The government has also taken steps to control inflation, such as imposing restrictions on exports of food commodities and providing subsidies to farmers. However, these measures have had limited success so far.
Overall, inflation is likely to remain a challenge for the Indian economy in the near term. However, the government and the RBI are working together to address the issue and keep inflation under control.
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