Good morning, namaskar. Governors, Deputy Governors, and other senior officials from various central banks of the global South, members of the Reserve Bank of India Central Board, secretaries and officials from government of India, distinguished panelists, speakers, and my colleagues from the Reserve Bank of India, ladies and gentlemen. I am delighted to once again on behalf of RBI welcome you to this high-level conference of central banks from the global South. This conference has been organized as a part of the commemoration of the 90th year of the Reserve Bank of India, which was established in the year 1935. It's been a long journey for the bank and the bank today has established itself as a credible public institution in India. This annual event is a part of various conferences and seminars which we have arranged this year, as again mentioned by my colleague Raj Ranan a little while ago, and he has already explained very well the focus of this conference and the background from where we are coming. I would like to just add that this year we have arranged three international conferences, this being the third one. The first one was on digital emerging technologies and new challenges, that was held in Bangalore. The second international conference was held in New Delhi in the month of October and the theme was 'Central Banking at Crossroads', and this is a theme specifically dedicated to issues critical and pertaining to the central banks of the global South. Depending on your feedback, we are extremely happy that all of you are here from various parts of the world. Depending on your feedback and the response and the interest we get, we indeed actually propose to convert this into an annual event whereby we will assemble together Governors, central bankers from the global South with focus on sharing each other's experiences and dealing with the emerging challenges, given the kind of uncertainties that we face and the uncertainties seem to be growing day by day.
Since my colleague has already explained the overall global situation very briefly, I would turn specifically to the subject of this conference. Over the last few years, as all of you would be aware, the global economy has gone through multiple crises. We saw a global pandemic, we have experienced supply chain disruptions and realignments, geopolitical conflicts and wars, a global surge in inflation, geoeconomic fragmentations in trade, technology, and capital flows, debt sustainability challenges across the world including advanced economies, and visible impacts of climate change. Together they have posed humongous challenges for all central banks, including those of us in the global South. This conference gives us an opportunity to learn from each other's experience and reflect upon our respective journeys over the past few years. In my address today, I propose to focus on three specific areas of policy and implementation which I feel contain useful lessons especially for the global South. These three areas which I'm going to focus on include: one, balancing inflation and growth; two, monetary policy communication; and three, crisis management. In each of these areas, I shall first present the Indian perspective and then highlight certain issues relevant for the global South.
Let me first take up the issue of balancing inflation and growth. The period since the onset of the pandemic is an example of how the Reserve Bank of India could effectively maintain balance between price stability and growth within the space provided by the flexible inflation targeting framework. The flexibility of this framework is embedded in the law itself, which defines the objective of monetary policy, namely to maintain price stability while keeping in mind the objective of growth. In terms of average rather than on a month-to-month basis, failure is defined as missing the target for three consecutive quarters. As monetary policy is forward-looking, the aim is to keep future inflation aligned to the target. Monetary policy involves taking a considered call with a degree of judgment in the best interest of the economy. How much weight is assigned to a particular objective, that is inflation or growth, depends on the assessment of risk it imposes on the balanced path of the economy. When COVID-19 hit the Indian economy, it was crucial to support the economy to avoid greater damage not only in the short term but also in the long term. We therefore used the flexibility embedded in the framework to focus on reviving growth as we looked through inflation spikes which were assessed to be transitory and driven by supply shocks. In hindsight, we were correct in our assessment, since inflation receded as supply chains normalized and the pandemic subsided. Incidentally, to set the record straight, the Reserve Bank of India had started the cycle of rate cuts one year before the pandemic as economic growth was slowing down while inflation remained aligned to the target. We had not even come out of the shadows of the pandemic when the Russia-Ukraine war started and drastically affected the entire policy calculus. The war-induced price pressures in key commodities, especially energy, edible oil, and food, together with domestic drivers such as weather disturbances, pushed inflation higher than the upper threshold of our target. Our target is 4% with a plus minus 2% either side given as a band, so the upper threshold was 6%. During this period immediately after the commencement of the war in Ukraine, our inflation exceeded 6%. This presented a situation in which inflation became a much bigger concern even as growth impulses were getting stronger. We responded to the need of the hour by changing the stance to withdrawal of accommodation followed by front-loaded rate hikes. Therefore, whether it was the pandemic-induced growth slowdown or the war-induced surge in inflation, monetary policy responded appropriately to address both the objectives of inflation and growth. The overarching priority was to achieve a balance between inflation and growth. The timing of each and every measure, especially when there was a change of course, was also equally important. And while doing all this, we were very much mindful of the issues pertaining to financial stability. What implications our policies would have on the aspect of the overall financial sector stability was also kept uppermost in our mind. That is the kind of complexity of challenges which I think every central banker in the world, and particularly in the global South, we face.
I would now like to touch briefly on the role of complementary policies. The years 2020 to 2023 were a period and it 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 neutralize the impact of these shocks through effective coordination with fiscal policy. 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. Thus, effective fiscal-monetary coordination was at the core of India's success in the face of a series of adverse shocks. From this perspective, macroeconomic stability becomes a shared responsibility of both monetary and fiscal authorities. Major structural reforms undertaken in India in recent years, in particular the introduction of the flexible inflation targeting framework, implementation of the nationwide goods and services tax, and enactment of the Insolvency and Bankruptcy Code, brought about a paradigm shift in the Indian economy and helped in raising the medium and long-term growth potential of India. Resilient growth has given us the space to focus on inflation to ensure its durable descent to the 4% target. A stable inflation or price stability is in the best interest of the people and the economy. It acts as a bedrock for sustained growth, enhances the purchasing power of the people, and provides a stable environment for investment. I would now like to turn towards certain relevant issues for the global South. In this context, I have two points to make. The first relates specifically to the importance of growth and price stability in the context of the global South. The global South faces more difficult growth-inflation trade-offs. First, unlike advanced economies, these countries have a lot of catching up to do to increase their per capita income and productivity. Therefore, growth is a fundamental necessity for these countries, but it cannot be and should not be at the cost of price stability. To achieve higher growth, both countries in the global South need to step up investment in physical and social infrastructure, leverage technology and innovations, and carry out institutional reforms. All these require congenial public policies, including monetary policies, to be growth supportive while maintaining balance with inflation. In fact, 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 an 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. The second point I want to make in this context relates to fiscal-monetary coordination in balancing inflation and growth and why it is important particularly for the global South. Another aspect of managing the balance between growth and supply-driven inflation relates to the role of fiscal-monetary coordination. This is very important for countries of the global South which have a significant share of low-income population with large developmental needs. They are most vulnerable to supply shocks, needing fiscal support which puts further burden on the limited budgetary resources of these countries. In this context, the Indian experience in managing supply-side inflation through effective fiscal-monetary coordination could be a learning template for all my fellow central bankers from the global South.
The second aspect as I mentioned, first I talked about growth inflation balancing. In the interest of time, I have tried to be very brief and to the point. I would particularly look forward, I'm sure all of us look forward to the detailed discussions, the panel discussions that we will be having around these themes. Let me now turn to central bank communication, which is the second area of my address. Over the last few decades, central bank communication has undergone a major transformation, from being cryptic and obscure prior to the 1990s to being eloquent and present in recent times. That has been the path of central bank communication. There has been greater realization that monetary policy in essence is the art of managing expectations, and its effectiveness is enhanced through active and more lucid communication. At the Reserve Bank of India, we have 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. For instance, we provided both state and time-based forward guidance of continuing with the accommodative stance of monetary policy during the pandemic to support growth. In the tightening phase which commenced in April-May 2022, the nature of communication was appropriately fine-tuned to ensure successful transmission of policy rate hikes. When we took a pause on the policy rate in April 2023 after having raised it by 250 basis points, it was important to anchor market expectations from running ahead or front-running the central bank. It was therefore emphasized that it was a pause and not a pivot. This was to ensure that past rate actions were transmitted fully to the broader economy. The focus was on anchoring inflation expectations by emphasizing our firm commitment to realign inflation with the target. We also categorically said that it is not enough to be within the tolerance band, and that our job is not finished until we reach the target of 4% on a durable basis.
Now I have talked about communication, the kind of approach we have adopted in the Reserve Bank of India. I would now like to focus on the importance of communication especially in the context of the global South. In countries of the global South, communication assumes greater significance and new dimensions. For the countries of the global North, communication was linked more to the exhaustion of conventional policy space once these countries reached the policy lower bound in the aftermath of the global financial crisis. This led to the adoption of forward guidance as a powerful tool to guide the expectations of the public. For countries of the global South, the focus on central bank communication is a more recent phenomenon and has been associated with a variety of factors in line with their macroeconomic, socioeconomic, institutional, and developmental stages. In the interest of time, I'll just focus on four points. First, the role of communication has increased with the transition of the economies of the global South towards establishing more independent central banks and the associated need for transparency in the interest of democratic accountability to the public. The adoption of inflation targeting by some of us since the turn of the century further necessitated effective and transparent communication to explain policy regime changes, institutional and environmental challenges, and also to guide expectations. Second, as central banks in these emerging market and developing economies gain greater independence in their sphere of operations, they realized the need for communication to adequately explain policy decisions, especially in the context of multiple objectives of growth and stability. Further, in periods after the global financial crisis and the pandemic, monetary policy easing in advanced economies increased the exposure of the global South to large swings in capital flows, exchange rate, and commodity prices. This has further complicated the tasks of central banks to explain policy trade-offs amidst continuing volatility. Third, there is growing recognition that effective communication obviates the need for large or frequent policy changes, or even any change at all, if inflation expectations are well anchored through appropriate communication. Of course, communication has to be backed by actual action as may be required from time to time. Overall, effective communication in sync with the conduct, stance, and goals of monetary policy would contribute to fostering macroeconomic stability. Learning from each other's experience and building synergies in this important aspect of monetary policy can go a long way in laying out the blueprint for best practices in communication for the global South.
The third area which I wanted to highlight relates to perspectives in crisis management. I have briefly touched upon our tempestuous journey while navigating the crisis-ridden years. Let me now briefly summarize how the Reserve Bank's experience has been unique among central banks. When the COVID-19 pandemic struck, we reduced the policy repo rate but not below our inflation target of 4%, which could have made the real policy rates negative if we had reduced it below 4%. Thus, we were not ultra-accommodative in our monetary policy at that time. We took conventional and unconventional measures to address liquidity constraints created by the COVID-19 related dislocations and lockdowns. These measures were not just aimed at enhancing the overall liquidity in the system but ensuring its distribution across the various needy sectors. These measures were not open-ended; in fact, most of these measures were time-bound and announced with preset terminal dates. In other words, when we announced these measures, they were offered for limited periods of time and the end date was also announced. As a result, the unwinding of the liquidity infusion that we did did not cause much market disruption. It automatically unwound itself because the end dates had been preset. Further, the counterparties involved in our liquidity operations were only banks and all-India financial institutions regulated by the Reserve Bank of India, with no dilution of collateral standards. In fact, the underlying strength of the Reserve Bank of India's balance sheet was not diluted. I am happy to share that within three years or so of the commencement of the pandemic, the size of the Reserve Bank's balance sheet had again come back to where we had started at the beginning of the pandemic. In other words, the liquidity infusion which had been carried out during the pandemic period had been pulled back, most of it due to the fact that the liquidity measures were not open-ended and had end dates announced at the time of the announcement of the measure itself, and also because of the various measures that we took at that time. In fact, if you recall, COVID hit most parts of the world in March 2020, and we started the process of infusing liquidity. In fact, we had started a bit of liquidity infusion even before the pandemic in the month of February 2020. And in the first quarter of 2021, we came out with a liquidity management framework, and under that we started slowly undertaking various specific measures to drain out the excess liquidity in the system. So if you recall, earlier on in my address today I had mentioned about timing, the importance of timing of decisions. So here again I would like to emphasize that not only the decisions have to be right, but the decisions have to be well timed, because as I had pointed out elsewhere very recently, often central banks are accused of doing too little too late or too much too early. So therefore, timing is a crucial aspect of every decision making, and a well-timed decision enhances its effectiveness. That is something which as central bankers I think it is our responsibility to at least endeavor to have a correct assessment of the current situation and the expected situation, the outlook, and suitably time our decisions.
We confined our asset purchase program during the pandemic to government securities and solely through secondary market, unlike some inflation targeting emerging market economy central banks that made emergency provisions to operate in the primary market to finance the government directly. In the 1990s, the Reserve Bank stopped automatic monetization of the budget deficit of the government. It was a major reform undertaken by the Reserve Bank of India in association with the central government, and we have adhered to that policy even till now. Although during the pandemic period, considering the stress that the economy and every individual, everybody all over the world we were facing, there were temptations to start financing the government budget deficit, but I think it was a considered call, a considered and prudent policy call taken not only by the Reserve Bank of India but the Reserve Bank of India and the central government together to avoid Reserve Bank direct financing of the government deficit. Instead, all the asset purchase program that we did by announcing government security acquisition program 1.0 and 2.0, we confined ourselves only to secondary markets. Also, the resolution frameworks for COVID-related stressed assets of banks and non-bank lenders that the Reserve Bank of India announced were not open-ended but were subject to certain financial and operational parameters to be achieved as part of the loan restructuring process. It may be observed that most of our pandemic measures were nuanced, keeping in mind the price and financial stability challenges that may arise in the future. So just as the liquidity measures which we had announced were not open-ended, similarly the resolution framework to deal with the stressed loans that the banks carried in their books or the non-banking lenders carried in their books, even for restructuring of these loans we set certain operational and financial parameters which the individual loan portfolio had to achieve at the end of the resolution period. So that ensured that the resolution that was actually implemented and worked out by the banks were prudent and specific to the requirements of the individual asset. Under this, there was also a requirement on part of the promoter of the company to deliver on these operational and financial parameters by the time the resolution period, which was 2 years, ended. Now during the tightening cycle in the aftermath of the war in Ukraine, our actions also stood out in contrast to many other central banks. First, the quantum of our rate hikes was not as high as those of several advanced economies where 75 basis points increase in interest rates became the new normal, as these economies had negative or near negative interest rates for quite some time preceding the onset of high inflation in these economies. Second, while changing the stance of monetary policy, our pitch was not as sharp as that of advanced economies. Our communication was nuanced and focused on building market confidence on the central bank's unambiguous commitment to align inflation with the 4% target. Third, we refrained from giving any forward guidance on the terminal rate in the prevailing cycle, given that such guidance was inherently risky in an uncertain environment. Fourth, even while pausing on the policy rate, we continued with the restrictive stance till we achieved a balance between inflation and growth.
Summing up, in designing our response to both the pandemic and the inflation surge, we have not been tied down by conventional theory or any kind of dogma. We were nimble and flexible in our actions and policies. To quote an eminent economist, and I quote, 'Good policy requires combining the science of the economist with the art of the practitioner.' In that sense, through our actions we have perhaps lived up to the maxim that says monetary policy is science, but monetary policy making is an art. It is however for others to judge. Let me now conclude. While the global economy has managed to hold its ground in the highly stormy weather of the past few years, clouds of uncertainties still loom on the horizon. Policymaking in this environment of heightened uncertainty is akin to driving a car through a foggy path ridden with speed bumps. These are conditions which will test the driver's patience and skill. Historical regularities are at the moment looking improbable, and policy makers are being put to test. When the history of our times is written, the experiences and learnings of the last few years will in all probability be a turning point in the evolution of central banking for the countries of the global South. Maintaining overall stability, which includes sustained growth, price stability, and financial stability, continues to be a daunting challenge. Central banks need to work towards more robust, realistic, and nimble policy frameworks that use monetary, prudential, fiscal, and structural policies synergistically to achieve the desired outcomes. I'm confident this conference today and tomorrow will throw up important ideas and takeaways for charting out a future course for the global South. I wish this conference all success. Thank you. Namaskar.
