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Need to focus on inflation amid steady growth: RBI Governor Das | Financial News
The Reserve Bank of India (RBI) needs to focus “clearly” and “unequivocally” on inflation, especially amid sustained economic growth, RBI Governor Shaktikanta Das said on Friday.
“…our target is inflation and we should keep growth in mind,” Das said while speaking at the Financial Express Modern BFSI Summit.
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“We monitor the growth numbers very carefully and I have said this on several occasions that the RBI Act mandates the central bank to maintain price stability (keeping inflation at 4%) keeping in mind the growth objective. So in all our monetary policy decisions, the growth aspect is always kept in mind,” he said.
Das highlighted that the country’s economic growth has been robust, with an average growth rate of 8.3% over the past three years.
“This year, our projection is 7.2 percent, and we are very optimistic that 7.2 percent will be achieved. In fact, we believe that the April-June quarter growth was 7.4 percent. And the growth momentum in Q2 continues to be strong. So, growth is holding steady; therefore, we have to focus clearly and unequivocally on inflation,” Das said.
READ TOO: Close coordination with government helped in quick recovery of economy: RBI governor
The domestic rate-setting panel has kept the repo rate unchanged at 6.50% since February 2023 to achieve the 4% inflation target on a lasting basis.
Commenting on the neutral interest rate, Das said, “Earlier, the neutral rate was pegged at 0.8–1 per cent, immediately after the pandemic, when potential growth was low. Now that Covid is well behind us, potential growth has picked up, and the neutral interest rate is pegged in the range of 1.4–1.9 per cent. So even if we say that real rates are high, it is not so.”
He said the RBI’s target is inflation, not a neutral interest rate.
Responding to a question on allowing real estate houses to enter the banking sector, Das said, “What India needs is not proliferation in the number of banks, but sound, healthy and well-governed banks. Global experience has shown that real estate companies, when they enter the banking space, there are potential conflicts of interest and also issues related to related party transactions. It will be very difficult to monitor or prevent related party transactions. So, the risks involved are very high,” he added.
However, he stressed that the RBI is open to receiving fresh applications for setting up universal banks. “I am not for a moment suggesting that the number of banks present is sufficient and that no further licences will be granted. All I am saying is that if applications are received, we will take a call,” he said.
The RBI governor reiterated his concerns over slow deposit growth, highlighting potential risks to the financial system from structural liquidity issues. “While there may be a debate about ‘deposits funding loans’ versus ‘loans funding deposits’, the current regulatory concern arises from the fact that there may be structural changes happening that banks need to recognise and accordingly craft their strategies,” Das said, adding that with credit growth remaining strong, banks need to continuously focus on improving and refining their credit underwriting standards and risk pricing.
He also highlighted the worrying rise in digital frauds, particularly those involving bank mule accounts. Banks need to strengthen their customer onboarding and transaction monitoring systems to monitor unscrupulous activities, including suspicious and unusual transactions. This also requires effective coordination with law enforcement agencies so that concerns occurring at a systemic level are detected and contained in time, Das said.
“The Reserve Bank is working with banks and law enforcement agencies to strengthen transaction monitoring systems and ensure sharing of best practices for controlling mule accounts and preventing digital fraud,” he added.
He also commented on the rise in unsecured portfolios of banks and non-bank finance companies. He highlighted that since November 2023, when risk weights for such loans were increased to prevent excessive risk accumulation, there has been a noticeable moderation in these target segments.
“It needs to be emphasised that the levels of delinquencies and leverage in small-value consumer loans warrant heightened vigilance. Issues like setting limits on unsecured exposures are best left to the boards of banks and NBFCs. While it is not our intention to be prescriptive on such issues, banks and NBFCs are expected to exercise prudence and avoid exuberance,” Das said.
Governor Das acknowledged the challenge posed by climate change to economic growth. He said the RBI is devising strategies to address climate-related risks and provide climate finance. However, he cautioned against the risk of green-washing and stressed the need for vigilance in this area.
Responding to a question, he said the government had a smooth relationship with the RBI during its nearly six-year tenure, crediting the close coordination between the two for the rapid economic recovery after the pandemic.
“I am saying this from personal experience. Nobody expects RBI to be a cheerleader. I have not had that experience,” he added.