MMA talk on Monetary Policy Inflation and Financial Stability - Part 2

0:00Of course, thanks also for pointing out the differences between an advanced economy and the rather dynamic growth oriented economies like India, which might require some tweaking in the various policies. And it is also good to note that our TFP is very high compared to the advanced economies. And that tells us that we can afford more inflation and obviously we have to target an inflation, which is a lot more than the advanced economies. And I'm sure people in the position to manage things are listening to you and calibrating their responses properly. And of course, the last is a very serious matter. Measurement of various things is not that much in India, correct or appropriate. In fact, it is perhaps one of the rare countries

1:01which have advanced estimates, advanced revised estimates, estimates. And then second estimates and first estimates, I mean, I don't know how many such estimates are there. I don't think this kind of thing happens in many other economies. Thank you so much. And what people do is we will take one question from the audience because they are of prime customers. We'll begin with them. And then I'll go on to a location where it's key. Any question? I can't see any question here. No question. We have a lot of questions online. OK, well, you can start with. Yes, sir. And what other questions have come, what you just know spoke about it, sir. It's a question from Shankar from Chennai. Based on your work leading national statistical committees, what improvements in India's data and statistical infrastructure are more critical for enhancing the quality of monetary and micro-economics policy making in your perspective?

2:03Well, let me be very clear. We have to take our data gathering and data generation. You know, because data, you have to generate estimates of inflation. You have to generate estimates of the GDP. You have to generate the estimates of consumption. You have to generate the estimates of investment, savings, and so many other things. Please note, it is an industry in itself. Right now, it is all in the public sector. And the government is doing this job in a meticulous way, trying to adhere to the international standards and trying to do that. However, we are lacking in certain kind of seriousness about it. The data, for instance, is not mandated to be provided in a timely fashion.

3:04As a result, what happens is that the agencies, which are responsible with doing these things, are not in a position to get these things. I mean, Kumar Swami said that, you know, there are so many different kind of advanced estimates and first, revise the estimates and second, revise the estimates and so on and so forth. This happens because the responses come very late. And there is nothing, no mandated things are there. So it is all free for all. People provide this information at their will and when they default, there's nothing happens. This is one important concern that I have as a participants, I think we have to be also responsible. Number two, I think there are serious efforts to update the base year. Unfortunately, the base year was supposed to be revised from 11, 12 to 16, 17. But 16, 17 was an year where there were serious kind

4:07of changes, like several demonetization occurred and the introduction of the GST was occurred. As a result, the system got destabilized. You cannot have selected 16, 17 or 17, 18 as the base year at all because it would not have represented anything. 1920 was supposed to be another year, but then you had COVID. And COVID destabilized the whole thing for two years. Therefore, now we are stuck with 2022, 23. And that is exactly the base we are now trying to do because we are trying to find out whether it is 2022, 23 is the right year or 2023, 24 is the right year. That is the reason why. But we are doing it. Now, unfortunate part is these things are very special to India. And we cannot, we cannot ask the IMF to make any exception for a country. A country cannot have the exception.

5:09They will give the rating, but they will make observations. And they have made the observation that otherwise the things are good. Except this problem of the base year revision. So base year revision is a serious issue. If I were in IMF, I would have pointed out this basic inconsistency between inflation measurement and growth measurement. And I would have punished the country for this. Unfortunately, IMF has not done that. IMF has not raised this issue. They should have raised this issue. Thank you, sir. Now, location region. Very, very interesting and enriching discussion, Dr. Dholakia. Thank you so much. I'd like to ask you that since 2017, when the flexible inflation targeting regime was introduced in the country, the inflation in 2016, yeah.

6:09So inflation has been rather under control. The volatility has kind of come down is what we have been observing. Maybe because of other reasons as well. And more central banks are now talking mainly about price stability rather than growth. They go first after price stability. But now you're saying that, but given all these, the way the problems with the whole structure of this FIT regime itself, you're saying it's better that look at growth. So what are the changes that you suggest that should be done? But do you think FIT is a good idea? Should we continue with it? But what changes need to be done so that we can go forward with it? Because it seems to be helping the countries, isn't it, in some way? Absolutely, absolutely. So on the face of it, I would say FIT is not a bad thing at all for the country. In fact, it was a very, very important economic policy reform that the IMF and World Bank both recognize at that time as the second most relevant reform

7:11after GST. So they said the GST introduction was the most relevant reform. The second reform was inflation targeting, flexible inflation targeting. And that is how we were rated higher in terms of the economic policy reforms and all that. This is important. I'm not against the inflation targeting in that sense of the term, but as I said, what you need to do is put all the four targets together work out a synchronized collaborative kind of an effort to set different targets for different purposes. I think you cannot have 8% growth with 4% inflation. It is impossible. With the remaining two, the fiscal deficit and target to be around 2 to 1.5%, and for fiscal deficit

8:11around 6%, you cannot have the target of 4% inflation to achieve 8% rate of growth out of question. Now, if you do these things, you are destabilizing the system. I mean, who is going to listen to that? The unfortunate part is that when you do the data analysis, the data analysis is based on the wrong measurements. So even that is not helping you. With the wrong measurements, my estimate of threshold inflation was running out to be 5.4%. If I correct for the measurement back on the envelope kind of a thing, then it will turn out to be around 4.8% inflation. That is the type of target that I would do. So if I have to now revise the inflation targeting, which is due in March, 2026, it will be revised again.

9:12But at that time, again, we will be talking about the bandwagon that if I change the target, I will have I lose the customers and investment. That is not the concern. The concern is what is the right kind of target? The right kind of target for me, I would rather say rather than a target, I would put a band. Of a small band, 4 to 5% is the inflation target with a tolerance band of 3 to 6%. So if you are asking me, what would I do? Under this circumstances, this is what I would do. Let me give precedence to you. I'm not sure if you have any. No, that's enough. Thank you so much. Let me give precedence to Dr. Charancing now. Dr. Charancing, you can unmute yourself and put on a video. Yes, sir. Thank you. Go ahead, sir. You can unmute, please.

10:12Yes. Listening to Dr. Delic here, always a player, a clear, absolutely clear strategy, a very clear thought. Dr. Delic, I totally support your view. Accept a minor tweak. The inflation target regime is now totally for review. If we are and you're so correct in mentioning, achieving a 8% to 8% and 5% potential growth that we have, we'll never be able to achieve with the full percentile. You're so correct. My thought was, this wixit borer has been introduced by the Prime Minister only by 2025. Now, though he has been talking about it for about a year, the inflation target predates this. An inflation target, as you rightly mentioned, was celebrated by the IMF. And anything which is celebrated by the IMF,

11:13I'm not always sure is good for us. Right? So my view would be, and going by your own research, and going by my own little research, I would say 5 to 7% inflation target, the band would be better, because you find that you found in your research the threshold level of 5.5%. And I looked at a 30 year average and found that 6% is where the inflation galvanizes. In a young demographic India, only 20 year window available to do, whatever we want to do with our young demographic, we don't have too long a time. IMF has been here for 75 years, will be there for next 75 years. We'll tease the IMF after 2047 that we have come back to your inflation target of 2% or 3%. But I think right now, our focus should be our youth.

12:14And we cannot strangulate growth. Now quite a bit, I understand that people here understand economics. My understanding is we have already done sacrifice ratio of 3% per year. That's not what we can afford. We cannot afford for the next 20 years. We are just lucky that our former governor is now the prime minister's advisor. If we are able to convince him that well, there is nothing to be excited or thrilled by saying our inflation is 0.25%. We have not a stagnant developed economy. There's nothing to be thrilled with it. I don't mind if everybody gets a job, but my inflation is 6%. Even that is a tolerable ban. Just wanted to add this. And Professor Durakay, I'm sure you are going to agree with that observation.

13:15Thank you so much. I'll agree with it very, very clear caveat that, you know, I have been talking about remasering the inflation in a correct way. The moment you remaser the inflation in a correct way, 6% will not sound 6%, 5.5%, will not sound 5.5%. And it will turn out to be around 4.8% or something like that. And that is why I'm saying that the inflation target in a properly measured context is 4% to 5%. And the ban, tolerance of 3% to 6% is a reasonable thing. If you exceed that ban, nobody is going to hang you. But you cannot exceed that ban, that ban for a long period of time, more than 3 quarters or something like that. I think that is a reasonable way of doing it. To come out of the inflation targeting right now, will be disastrous.

14:15Because unfortunately, the market participants don't understand economics, sir. Had they understood the economics, this would not have in the case at all. I mean, you can't expect the dollar to become stronger. What is their economy? What is happening to the American economy and whatever surrounds the dollar? So nothing supports that. Nothing supports that. And you have exactly the opposite thing. We are facing the music in terms of the financial non stability on account of the sharp depreciation. Why? In fact, all the basic fundamental show that our rupee is likely to appreciate in the longer run. And longer run is not very long run. It is going to be three to four years.

15:16So is the market participants, are the market participants understanding any of these things? I have very serious questions on that. Because market participants depend. On doing the homework. With the rating agencies. And rating agencies are not doing their homework. Let me tell you this. Sir, I think the questions so far have been surrounding the main area which was announced. I would like to go a little further now. One of the aspects of financial stability as of now is the quality of reserves. You know, the India has about nearly 85% of reserves in dollar, Aussie dollar and the euro. All of them are more pieces of dollar if I can call it. They are not different. If USA is everybody will, you know, do whatever they want. Isn't it a huge risk in that sense that, you know, if US does what it has done, US and Euro, Europe, you know,

16:20what they have done to Russia, the free is our reserves. Then what happens to us? You know, there will be a huge instability. Of course, yeah, of course, Russia has now retaliated. If you freeze our 300 billion, I will freeze your one trillion of investments, private investments in Russia. And he has taken the measures and he has already got it passed, I think, through his whatever is a local form of parliament. That is fantastic. But I think I'm going beyond a point, which I had made in the opening remarks is dollar itself worth it. Will they be in a position to, you know, even raise, you know, enough dollars to repay their own, you know, ensuring debts. In fact, I am told that they are even crawling at the feet of Venezuela now, to supply them, you know, cheap oil. This is the, you know, development in the last one week to 10 days. So if that is the case, if US will find it difficult to raise that two to one half or maybe even three trillion of deficits further on use,

17:23what is going to be the future of dollar itself? That is my question. The entire five hundred and four hundred and sixty four after that, rather about six sixty five sixty seven. Outer that six sixty eight is, I'm counting out the SDRs is in, you know, currencies. He's, you know, Reserve Bank, you know, doing anything about it and, you know, calibrated way. So as to remove this disturbance, this is my question. See, it's a good question. Your observations are reasonably valid. In fact, I would say that the dollar weaknesses are very clear. They are apparent and they are coming forth day by day. In fact, every day, there is a new revelation about the weaknesses of the dollar and American economy. I think there is some kind of a bite, which is in circulation in the social media.

18:23Very, very, very many people must have watched that also. That there is a, there is a history and there are cycles about the dominance of a currency. Dollar has dominated the world currency for a long time. But now it is almost on the verge of completing its average period. That means that and and fortunately or unfortunately, the weaknesses have started coming out. I mean, just as in the past, other currencies were dominating dominating the world and the weaknesses came out and they had to give way to the other currency. Right now also dollar has the same kind of things coming out. And my my clear cut, I mean, I fully agree with you that the dollar has serious weaknesses, as far as the the unilateral decisions of de-recognizing the reserves

19:24and freezing the reserves, et cetera, et cetera. I think, you know, with all the insanity that the American leadership is showing, I think this is part two. Insane thing to do. And I don't think that people will be doing that. I mean, don't equate ourselves with Russia. We are, we are very democratic. We are very different kind of content. It is not authoritarian in any sense of the term. And it is very difficult for anybody to freeze this kind of assets. It is impossible. As far as the, what RBI has been doing, if you want to see, please look at the things yourself. You will see that the gold reserves are slow and gradually arising. Obviously, they should rise because of the simple reason that there are uncertainties of our dollar. But the unfortunate part is we cannot completely deal.

20:26We are trying to ensure what RBI is also doing is, we are trying to ensure that Ruby gets accepted as the medium of a change in several other kind of trade relations. If that happens automatically, we are taking the necessary course. I think that is something which we need to keep in mind. Sir, next is a question and through the media from one Miss Malvika. Sir, I have a question given the uneven burden of inflation across diverse income groups and regions. How should monetary policies and fiscal policies be coordinated to mitigate distributional harms while also preserving macroeconomic stability? Excellent. Please note that monetary policy is not expected to talk about the inequalities. You are referring essentially to the inequalities.

21:26The unequal burdens which are supposedly shown through the different inflation rates that is a different ballgame altogether. But please understand and note, we have done some research on this. And I think Piketty has done a lot of research on this inequality question. And what we have found is using his own data, using his own thing for the Indian economy over the period of time. We are showing that inequalities have nothing to do with the growth on one hand and inflation on the other hand. That means higher inflation leads to higher inequalities the wrong thing. Higher growth leads to higher inequalities the wrong thing. Higher growth leads to lower inequality again is not supported.

22:28I mean lower higher inflation leading to lower inequality again is not supported. That means that inequality and inflation inequality and growth are very different distinct thing. Now please understand monetary policy is not the means to address the inequality issues. Inequalities are better addressed directly by the fiscal policy. And that is what is being done off late after 2022-23. In fact, after COVID you find that the inequalities in India have sharply fallen. Because there is a lot of free food and other things which are being targetedly given. And this has worked. I think so please understand that this differing inflation rate across different items is not the concern that can be handled effectively by the Reserve Bank of India or RBI for monetary policy.

23:36There is no way of doing it. There is no theoretical framework or no theoretical way. Locationary, you had some question about the public debt and the instability it can create. Yeah, but I thought I'll ask rather something on the exchange rate. Change my mind staying with the rupee and all that. So you said that exchange rate is used to control the money supply in a theoretical format and so on. But rupee if we see over the last 20 years it's depreciating most of the time. Like annual average depreciation rupee over 20 years is 5% annually. And last 10 years is 3.5%. It keeps falling and last 10 years only one year it is appreciated. Yes, stated policies that it will only intervene to contain the volatility in the rupee. That's what they keep saying every time we ask them this question. So what exactly is there some unstated kind of a policy that they are more comfortable with a depreciating rupee rather than appreciating rupee.

24:44Is there or is it is because it's happening because what you're saying because of the the problems in the way they're going about the monetary policy itself. Is the rupee depreciation an outcome of that. No, no, it is not an outcome of the monetary policy at all because you know right now the rupee is depreciating. I mean it is a very surprising thing and very in a way inexplicable kind of a thing. Why is it depreciating just because of the expectations nothing more than that. There are there are wrong things which are being emphasized by people in a wrong way. Like say for instance there was a huge media coverage and everything regarding the Trump tariff. Now what is the exact implication what are the exact things RBI itself has studied this question thoroughly. And what is the talks about it says that with all the things happening the impact of Trump tariff will be hardly 20 basis point negative on the growth.

25:56On the other hand on the other hand the positive effect of the GST reforms will be in the range of 50 to 60 basis point. I mean rather than emphasizing these matters people are unduly focusing every day you you start the TV you start any other thing and people talk about what the new dream that the Trump has seen after waking up in the morning. And it is only those news news items which are I mean it is creating a sort of a panic I don't know whether the market participants are intelligent enough to discount some of these kind of panics I don't know. I start having doubts about the intelligence of some of our very big market players because you know the market is in India unfortunately it is not a perfect market.

27:07It is far from perfect market and you know that it can be manipulated so I am not too sure and I will not give evidence to the short run kind of fluctuation because short run fluctuations you cannot address by any policies. Policies are meant for long term policies are meant for providing the guidance policies are meant to really provide a long term path I think the short term fluctuations and short term things are better left to the market. This is what are the basis what on which you said repeat should appreciate in the next three to four years because our growth rate has been phenomenal in spite of the fact suppose 8.2% you don't believe don't worry 7% you believe right 7% versus 2% you can see the difference.

28:08Now you know this difference is largely in terms of productivity productivity growth so that means that our inflation rate of something in the range of 4 4.5% right and their inflation rate right now is around 3% it is not 2% anymore it is 3%. Now what do you expect you expect that you know there should be an appreciation over a longer period by at least 3% to 4% it doesn't happen because of various reasons and people start focusing on the current account deficit the import growing faster exports are lagging and things like that I think it is all a short term phenomenon. It is all we are managing at a different level it is not RBI which is managing is the government which is managing because these are not they are not in the hands of government in RBI to promote exports or to compete with the imports and promote the domestic production is not RBI matter at all.

29:16Now Captain next 2-3 questions we have 490 viewers a number of questions come we have got another 7-8 minutes I will try and ask many questions as possible. We have a question for Ravi Kumar from climate to how should India monetary policy framework evolve to better absorb the global shocks such as commodity price volatility geopolitical uncertainties and rapid financial tightening in advance economies we thought compromising the growth momentum. It is extremely difficult to compromise to not to compromise the growth momentum if you want to not compromise the growth momentum you will have to absorb the shocks by the market rather than do any positive proactive things. Next question from Mr. Francis from Hyderabad is if with gold price heating record high under influencing the domestic markets how should India view gold as a safe haven asset and driver of external sector precious can monetary policy meaningfully address these fluctuations.

30:23The gold prices fluctuations cannot be I mean any commodity for that matter cannot be a specific commodity prices are not in the realm of the RBI RBI is supposed to be talking about the general price level general commodities and other things I think these are all the the specific item wise prices fluctuations. And that should be left to the market in a way I think again I am telling you if for the price of gold anything has to be done it is by the government in the fiscal policy not in the monetary policy this is not the way. Mr. Ravi again from Chennai he says given the current inflation trajectory and growth outlook what key factors should guide future reparate decisions how does the RBI balance the trade out between supporting growth and containing inflation.

31:27Very good I think the because you know you are specifically asking for how does the RBI do all these all some things without divulging the further details I can only broadly say that there is a very good framework which is available by the Taylor's rule the Taylor's rule suggests that if the inflation is lower than the target. Then the monetary policy needs to be more relaxed if it is an easy money policy similarly if the if the growth rate is well above the trend rate or the potential or potential rate of growth then the monetary policy needs to be tightened unfortunately there are controversies about what is the potential rate of growth. From Rajan and many others other economies very serious and serious senior economies have been talking about the potential rate of growth to be around seven and a half to eight percent in India I am I am no exception I am also talking about that but some statistical measures show that the potential rate of growth is around six and a six point eight percent to seven percent that is a statistical

32:49jugglery it doesn't talk about the ground reality is the ground reality is that India has a potential rate of growth of around eight percent without igniting the inflation. The next question is a multi from Bangladesh in what ways do increasing fiscal pressures such as higher government borrowing or subsidies limit the RBA monetary policy effectiveness and how can better fiscal monetary coordination can be achieved. Fiscal policies are the ones which are essentially I mean considering the subsidies and the tax issues and that should really be left to them the RBI is only supposed to follow the broader kind of framework where is the fiscal policy more accommodative and more easy or is it type fiscal policy. I think the type fiscal policy or the easy fiscal policy is to be seen in terms of the absolute absolute not relative absolute fiscal deficits is a is a single kind of a parameter which is workable it is not theoretically correct but I mean workable so if there is a fiscal deficit which is it is larger than before.

34:15Then it is a more relaxed policy if the fiscal deficit is the lower in absolute terms then it is a tighter fiscal policy. One last question to you sir from then there is also one question addressed Mr. Kumar asami and also locationy the last question is how important is table for investment flow for maintaining group stability what policy measures beyond monetary policy could support these objectives. Very good question in fact what it says is how far the external flows are important for financial stability is in the country where it is very high although the on margin the magnitude is seems to be small as compared to the domestic economy on margin if you see.

35:15It is a very substantial flow therefore if the flows are in in flows are very very large all of a sudden you have the problem of domestic financial stability and if the flows are very low again you have opposite kind of the problem of financial instability to maintain a constant and consistent flow is important therefore. Now in order to do that the RBI is typically talking in terms of its reparate adjustment vis-a-vis the world vis-a-vis the US and the other things that what is there reparate and what is our reparate because we should not provide a decent setting. Unfortunate parties that the interest rate parity has the country specific risk factor which is added say for instance if the US rate is 4% and our rate is 6% 2% or maybe 2.5% becomes the risk factor for India.

36:29Can anybody explain to me what is the risk factor and does it justify a 2.5% type of factor. Sir are we that poor in terms of the economy is our stability not there is our performance not there then what is that it is only because the rating agencies are giving us BBB plus whereas US with all the blunders on earth they get a double a and things like that sir why should that happen why should that happen if it is a forward looking thing. Then look at the forward things sir is there any possibility at all for the US debt to come down on the other hand India the public debt that you know debt GDP ratio has been consistently coming down after a hike during the covid period.

37:36covid period was not within our control but thereafter it has been significantly coming down. So what is the future trajectory sir that is the reason why I am I am a bit disappointed by the rating agencies on one hand and our own people interpreting those things on the other hand. And anyway the foreign investors are very clear sir if they are they are the portfolio investors they are the fair weather friends if they are the the FDA investors the real investors they are the ones whom we should really worry about. And my only concern is that we are offering the best kind of environment for any permanent friends which means the FDA is the best destination right now in the world.

38:38Excellent sir one last question quick response from one location one for Kumaraswami. Here a question from Steve Kumar to location. Monetary policy decisions can become complex and technical what role does the responsible financial journalism play in shaping public understanding and expectations around inflation, interest rates and financial system. Yes I think it's up to us to really explain it in a simpler form that the me that common people can understand. I know that some of them is very complex even we cannot understand we try try our best listen to people like Dr Dholakia to understand it and we do our best. I have suggested the RBI itself also that by can they put out explainers you know maybe in regional languages also maybe do short videos because I think the RBI you have so many people who are so intelligent and you have a very good workforce. So sir maybe you can put across to them you know to even educate us or even train the media RBI should be doing that.

39:43Yeah I'll I'll take this suggestion very positively I'll try to do something thank you. Here's a question to Chairman Kumaraswami sir from your experience observing communities across India what behavioral or structural factor do you believe or underestimated in the current understanding of inflation and household financial stress. The answer to this complicated question but you know I would answer an analogous question. First of all there is no monolithic inflation figure which is going to work for everybody that's for not sure. Inflation in you know Madurai will not be inflation in Chennai and it will not be in Agra that's for sure. So how it affects you know each different class is going to be further you know going to be very very fragmented. In fact I was to ask a professor one question about pensioners inflation index.

40:43In fact you look at the pensioners like me we have a roof or a head so housing inflation doesn't really concern me after work I've stopped traveling so I mean day to day travel to office or no fuel inflation for me. Food nowadays the second or the third if any of the restaurants threaten a second or third rotate away from the table itself that is you know the consumption is more governed by need to control weight and you know dieting etc. Main thing which is affected by inflation is only the medical expenses so far have been you know lucky there but that will concern all this one. If one of the arguments given for high and low inflation is pensioners interest versus employment or beginners when people looking for you know jobs. Care is it not time to construct a pensioners index and use that as the basis at least give a weightage if I'm not saying the 100% weightage should be given.

41:43Give a due weightage to that inflation as well as the headline inflation or the GDP deflator if it has to be corrected as the basis for you know monetary policy and fixation of the central targets rather than you know. Currently I mean the 4% the way it is justified I'm not very you know satisfied or convinced but that's a matter for a different day. So that's the answer I can give at this stage to the rather complicated question for me here. Thank you thank you sir I think we have really run all time and thank you for the now stunning great inside is so inspiring. We are only feeling disappointed why we have come to the end of the program you could have carried on for some more time to understand more and also thank you. Thank you to come out of some of your participating.