Informist, Tuesday, Oct 19, 2021
NEW DELHI - Calling for greater emphasis on supply-side reforms, Reserve Bank of India staff have said the sole focus globally on normalisation of monetary policy should ease.
"Perhaps the need of the hour is not to focus so singlemindedly on normalisation but on supply side reforms to ease the bottlenecks and disruptions, labour shortages and high commodity prices, especially of crude," RBI staff said in the monthly 'State of the Economy' paper, released late Monday.
The paper, which counts Deputy Governor Michael Patra as one of its authors, does not necessarily represent the views of the central bank.
"Markets fear that the inevitable rise in interest rates is going to be driven by a rise in inflation rather than a rise in the pace of growth. Premature tightening could bring about the stagflation that all fear, quashing growth just as the economy is recovering," the paper said, going on to quote US Federal Reserve Chair Jerome Powell, who recently said central banks were guilty of "underdoing" it.
"And pretty much in every cycle, we just tend to underestimate the damage and underestimate the need for a response. I think we've avoided that this time," Powell said in a speech last month.
Speculation has been rife, both domestically and globally, that central banks may soon begin to tighten interest rates in response to rising inflation. In India, the RBI has looked to rebuff such sentiment, asserting that conditions will remain accommodative.
The RBI staff paper added that while the global environment remained uncertain, the Indian economy had crossed a turning point in Aug-Sep after the second wave of the coronavirus pandemic had moderated the recovery that was underway till then.
"Consequently, policy support for a sustained and inclusive recovery may be needed for longer. In particular, the choice of policy mix will need careful consideration and sensitivity as it is expected that employment may weigh on the recovery, with people having lost incomes and jobs, and those that have jobs have lost purchasing power," the paper said. End
Reported by Siddharth Upasani
Edited by Vandana Hingorani
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