Focus on inflation over growth at next policy review meet: Viral Acharya to RBI

Former RBI Deputy Governor Viral Acharya on Saturday said inflation is higher than expected and the rate-setting panel should "respect" its core mandate of controlling price rise at the next week's policy review meet

The comments come even as there is an increased clamour for further rate cuts to aid the economic recovery, even as headline inflation has breached the 6 per cent level in June, which is beyond the comfort of the RBI, which has been tasked to keep inflation at 4 per cent in medium term with a 2 percentage points leeway on either side.

While many analysts are expecting a rate cut of 0.25 per cent to accommodate for growth, some have opined that the price rise situation may result in the RBI going for a pause.

"In my view, what the MPC should take seriously is that you have a legal mandate. You are charged with maintaining a headline target rate of 4 per cent on Consumer Price Index inflation," Acharya said during a chat hosted by Bhavan's SPJIMR.

He said growth, which has dominated the decisions in recent times, is only a secondary objective for the Monetary Policy Committee (MPC) and termed it as a caveat in the contract between RBI and the government.

"...you can't alter the primacy of the legal mandate that is given to you. You have to respect that. That's what democratic accountability is about,” he added.

Acharya, who went back to teaching at a B-school in New York after resigning from the RBI last July, said he is not up to date with latest inflation models and forecasts and also added that getting data has been difficult over the last six months.

"My sense is that inflation is higher than what most people had thought,” Acharya, who had himself been an ex-officio member of the MPC, said.

He said the inflation targeting framework is a necessary aspect which gives confidence to the external investors about India's commitment, and as a country which depends on investment inflows, it is in India's interest to carry forward on the path.

He reiterated the demand for “re-privatisation” of the state-run lenders, calling the 1969 move as a “massively failed experiment” which has also only served the political needs.

Acharya said the benefit from a labour perspective can be another motivation for the PSBs' continuing stature to be government run, saying they have become into “cosy enterprises”.

However, taxpayer's money is being wasted on the repeated recapitalisation exercises, Acharya said, pegging the loss to the national exchequer on its investments in the state-run banks at up to Rs 3.5 lakh crore as compared to the same amount of money being invested in the 50-share Nifty benchmark or the sectoral indices for private sector banks.

There is a need for the government to come out with a revised fiscal deficit road map number for the medium term to establish its credibility and seriousness, he said, adding that this is a specific need told by rating agencies as well.

In the present Covid-19 situation, recapitalisation of banks and spending on infrastructure can help the battered economy, he said, adding the RBI's financial stability report can be utilised for assessing every bank's requirement.

There is also a need to review the potential rate of growth for the Indian economy, given the steady decline which the company has experienced every quarter in recent times, he said.

Acharya also said that the RBI should put in place a dedicated cadre for supervisory function the soonest.