Informist, Friday, Sep 13, 2024

--RBI Das: Prospects of a hard landing appear to be receding globally

--CONTEXT: RBI Governor Das at Future of Finance Forum, Singapore

--RBI Das: Effects of monetary policy divergences starting to unfold

--RBI Das: Policy easing needs caution as global disinflation slows

--RBI Das: Policymakers, regulators must work with renewed urgency

--RBI Das: Persistent inflation in global svcs sector poses huge risk

MUMBAI – A day after India's headline inflation rate for August came in below the Reserve Bank of India's 4% target for the second consecutive month, Governor Shaktikanta Das today said the central bank still some "distance to cover" and can't "afford to" ignore prices.

Speaking in Singapore today at the Future of Finance Forum 2024 organised by the Bretton Woods Committee in Singapore, Das said, "Inflation has moderated from its peak of 7.8% in April 2022 into the tolerance band of +/- 2% around the target of 4%, but we still have a distance to cover and can not afford to look the other way." According to the RBI's projections, inflation is expected to remain above the target for the current and next year, with 4.5% in 2024-25 (Apr-Mar) and 4.1% in 2025-26.

Talking about India's growth, the governor said that the RBI's projection of 7.2% for the current financial year reflects the underlying strength of India's macro-fundamentals, with domestic drivers--private consumption and investment--playing a major role.

Commenting on the liquidity situation in the Indian banking system, Das said that stress tests conducted by the central bank revealed that banks and non-banking financial intermediaries will be able to maintain regulatory capital and liquidity requirements even under severe stress scenarios.

With the US Federal Reserve's widely anticipated rate cut merely a few days away, Das also spoke about risks emanating from easing monetary policy across the globe sooner than needed. "The momentum of global disinflation is slowing, warranting caution in easing monetary policy," Das said.

Das highlighted the persistence of inflation in the services sector. The balance sheets of intermediaries globally are at risk from recognised and unrecognised valuation losses due to a combination of elevated wage growth and constrained productivity, he said.

Monetary policy in two major advanced economies, the US and Japan, is diverging, with the US widely expected to cut rates in its meeting on Sep 17-18, while the Bank of Japan jolted the markets with a rate hike in the previous meeting and is expected to further tighten its policy. In this backdrop, the governor warned about risks from such divergence. "The implications of monetary policy divergence among countries are beginning to unfold, especially in the form of exuberance and sudden sell-offs in financial markets," he said.

Das said that the last mile of disinflation has proved to be challenging for the global economy, which is posing risk to financial stability. However, the prospects of a hard landing appear to be decreasing, he said. "As market expectations about the future course of monetary policies re-align with policy guidance from central banks, the prospects of a hard landing appear to be receding," he said.

The stickiness in inflation could delay the return to price stability which, in turn, increases external, fiscal and financial risks, Das said. In such a scenario, monetary policy management by central banks has to be prudent and supply side measures by governments have to be proactive, he said.

Policymakers and regulators globally have to work with renewed urgency to buffer economic activity and the financial sector from unforeseen shocks. "A flexible and robustly equipped regulatory architecture in the financial sector would be essential to stay ahead of the curve and minimise risks. Macroeconomic policymakers and other stakeholders must also be quick to adopt a forward-looking approach to navigate the difficult bends and turns on the road ahead," Das said.

Highlighting the disparity between different emerging economies and advanced economies, Das said while some emerging economies display resilience and adaptability, some low income countries are still in a vulnerable situation. A few advanced economies are also at the risk of facing a slowdown, he said. End

Reported by Kabir Sharma

Edited by Akul Nishant Akhoury

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