Macroeconomic stability is a shared responsibility of both monetary and fiscal authorities and effective fiscal-monetary coordination was at the core of India’s success in the face of a series of adverse shocks, said Shaktikanta Das, Governor of the RBI, on Thursday.

       “The 2020-23 period was unique in view of the incidence of multiple and overlapping shocks to food and oil prices, which challenged the conduct of monetary policy. It was necessary to neutralise the impact of these shocks through effective coordination with fiscal policy,” said Das, adding that while monetary policy worked on anchoring inflation expectations and containing demand-pull pressures, effective supply management by the government alleviated supply chain pressures and moderated cost-push inflation.

       Additionally, Das highlighted that a stable inflation is the bedrock for sustained growth as it enhances the purchasing power of the people and provides a stable environment for investment.

       Speaking at the high-level policy conference of central banks in Mumbai, Das said, price stability is just as crucial as growth to enable economic agents to plan ahead, reduce uncertainty and inflation risk premium, encourage savings and investment, all of which provide a boost to the potential growth rate of the economy.

       “Thus, in the long-run, price stability supports sustained high growth. Price stability is also important because high inflation is disproportionately burdensome on the poor,” he added.

       Das also said that resilient growth in the Indian economy has provided RBI with the flexibility to focus on inflation, aiming for a sustainable decline towards the target of four per cent. He emphasised that stable inflation is in the best interest of both the people and the economy.

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       The governor’s comments come at a time when headline inflation in October has breached the upper tolerance band of the monetary policy committee (MPC). In October, CPI inflation stood at 6.2 per cent and in September it was 5.5 per cent.

       In the last MPC meeting in October, while the panel voted to keep policy rates unchanged, they changed the stance to “neutral” which led to speculation about a potential rate cut in December.

       However, with inflation readings for September and October remaining uncomfortably high, market participants have ruled out the possibility of a rate cut in December. Furthermore, there is uncertainty about whether the RBI will cut rates in February, with many speculating that rate cuts may only begin in April.

       That said, concerns about domestic growth are starting to emerge. But the RBI bulletin for November sounded optimistic on growth and said private consumption was back to being the driver of domestic demand and promising rabi crop prospects augured well for farm income and rural demand.

       However, RBI’s ‘State of the Economy’ report has warned that rising prices, if unchecked, would undermine prospects of the real economy while cautioning on the spillover effect of rising food prices on headline and said uptick in core inflation is a “worry”.

       Meanwhile, the governor on Thursday said, the RBI has actively used communication to anchor expectations. “When conditions warranted, we combined rate and liquidity operations with appropriate forward guidance for greater effectiveness of our policies,” he said.

       Das also highlighted that within three years or so of the commencement of the pandemic, the size of the RBI’s balance sheet has again come back to where it had started at the beginning of the pandemic. “In other words, the liquidity infusion which had been carried out during the pandemic period, has been pulled back,” he said.

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