The Reserve Bank Deputy Governor, Anand Sinha, today said when financial risks rise, the focus of monetary policy should be to contain them even if that means sacrificing growth in the short-term.
Addressing the FIBAC banking conference here, Sinha, without referring to the domestic context, where forex market volatility forced the RBI to adopt liquidity tightening measures since the past one month, said monetary policy has to be sensitive and it cannot leave everything to macro-prudential measures.
“Central banks while formulating their monetary policy will have to keep a much longer time horizon (normally two years) in view and adjust their monetary policy so that the objective of financial stability is achieved even if it leads to some dip in growth and some under-shooting of inflation target,” Sinha said, though he did not directly allude to the domestic context.
The rupee has plunged nearly 12 per cent since the beginning of the fiscal. Ironically, none of the measures like jacking up call money rates by a whopping 300 per cent to 10.25 per cent, increasing the daily CRR reporting to 99 per cent and draining money out of the system, have had a lasting impact on the Indian currency so far.
The central bank has not given a timeline to roll back any of these measures and these have triggered worries over the impact on economic growth.
“Macro-prudential regulations and monetary policy should move in the same direction,” he said.
Explaining the rationale for this time-lag difference, the Deputy Governor said, “typically central banks while framing up monetary policy look at a two-year horizon, but financial imbalances actually build up over a longer period of time.”
This also means that if at all inflation falls below the targeted level for a short while, that is not a necessary condition to shift monetary policy focus, he said.
“Growth may come down a bit and inflation target may go below the target—that is, if you have target 2 per cent it may become 1.8 per cent. But this is the price which monetary policy will have to pay. So, from a systemic perspective, the two will have to adjust to each other,” he said.