RBI Governor Shaktikanta Das At The High-Level Policy Conference Of Central Banks |CVR ENGLISH

The overarching priority was to achieve a balance between inflation and growth. The timing of each and every policy measure, especially when there was a change of course, was equally important. While taking all these measures, we were very mindful of the issues pertaining to financial stability. The implications our policies would have on the overall financial sector stability were kept uppermost in our mind. That is the kind of trade-off and complexity of challenges which I think every central banker in the world, particularly in the global South, faces.

I would now like to touch briefly on the role of complementary policies. The years 2020 to 2023 were unique due to 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. Effective fiscal-monetary coordination was at the core of India's success. From this perspective, macroeconomic stability becomes a shared responsibility of both monetary and fiscal authorities. Major structural reforms undertaken in India in recent years—particularly 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 and helped raise India's medium- and long-term growth potential. Resilient growth has given us space to focus on inflation to ensure its durable descent to the 4% target. Stable inflation acts as a bedrock for sustained growth, enhances purchasing power, and provides a stable environment for investment.

I would now like to turn towards certain relevant issues for the global South. The first point: the importance of growth and price stability. The global South faces more difficult growth-inflation trade-offs. Unlike advanced economies, these countries have a lot of catching up to do to increase per capita income and productivity. Growth is a fundamental necessity, but it cannot and should not be at the cost of price stability. To achieve higher growth, countries need to step up investment in physical and social infrastructure, leverage technology and innovation, and carry out institutional reforms. All these require congenial public policies, including monetary policies, to be growth supportive while maintaining balance with inflation. Price stability is just as crucial as growth to enable economic agents to plan ahead, reduce uncertainty and the inflation risk premium, and encourage savings and investment. In the long run, price stability supports sustained high growth. High inflation is disproportionately burdensome on the poor. The second point relates to fiscal-monetary coordination in balancing inflation and growth, especially for the global South. Another aspect of managing the balance between growth and supply-driven inflation is the role of fiscal-monetary coordination. This is very important for countries with a significant share of low-income population and large developmental needs, who are most vulnerable to supply shocks needing fiscal support. 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.

Let me now turn to central bank communication, the second area of my address. Over the last few decades, central bank communication has undergone a major transformation from being cryptic and opaque prior to the 1990s to being eloquent and present in recent times. 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 proactive 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 instance, we provided both state- and time-based forward guidance on continuing with the accommodative stance during the pandemic to support growth. In the tightening phase that began in April-May 2022, communication was appropriately fine-tuned to ensure successful transmission of policy rate hikes. When we paused the policy rate in April 2023 after raising it by 250 basis points, it was important to anchor market expectations and prevent front-running. We emphasized that it was a pause, not a pivot, to ensure past rate actions were transmitted fully. 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; our job is not finished until we reach the target of 4% on a durable basis.

Now, 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 countries of the global North, communication was linked more to the exhaustion of conventional policy space after the global financial crisis, leading to forward guidance as a tool. For the global South, the focus on central bank communication is a more recent phenomenon, associated with factors in line with their macroeconomic, socioeconomic, institutional, and developmental stages. First, the role of communication has increased with the transition towards more independent central banks and the need for transparency and democratic accountability. The adoption of inflation targeting further necessitated effective communication to explain policy regime changes and guide expectations. Second, as central banks gain greater independence, they need to explain policy decisions, especially given multiple objectives of growth and stability. After the global financial crisis and the pandemic, monetary policy easing in advanced economies increased exposure to large swings in capital flows, exchange rates, and commodity prices, complicating the task of explaining policy trade-offs. Third, there is growing recognition that effective communication obviates the need for large or frequent policy changes if inflation expectations are well anchored. Communication must be backed by actual action as required. Overall, effective communication in sync with the conduct, stance, and goals of monetary policy contributes to macroeconomic stability. Learning from each other's experience and building synergies in this aspect can lay out a blueprint for best practices in communication for the global South.

The third area I want to highlight relates to perspectives in crisis management. I have briefly touched upon our tempestuous journey 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 real policy rates negative. Thus we were not ultra‑accommodative. We took conventional and unconventional measures to address liquidity constraints from COVID‑19 dislocations and lockdowns. These were aimed not just at enhancing overall liquidity but ensuring its distribution across needy sectors. The measures were not open‑ended; most were time‑bound with pre‑set terminal dates. As a result, the unwinding of liquidity infusion did not cause much market disruption—it automatically unwound because the end dates had been preset. Further, the counterparties in our liquidity operations were only banks and all‑India financial institutions regulated by the Reserve Bank, with no dilution of collateral standards. The underlying strength of the Reserve Bank of India's balance sheet was not diluted, and I'm happy to...