Mumbai: The Reserve Bank of India that has been dropping interest rates since the covid pandemic broke out a few months ago has received a word of caution. That, from former Deputy Governor Viral Acharya.
Acharya during a chat session hosted by Bhavans SP Jain Institute of Management and Research observed that the regulator ought to focus on inflation. According to Acharya, inflation was higher than expected and the RBI MPC panel should "respect" the core mandate of controlling price-rise in its next policy review meet.
The RBI policy announcement is expected this week.
Meanwhile, a number of analysts had differing views on the RBI's probable stance. A majority of analysts and those linked to sectors such as construction are hopeful of the RBI dropping rates and maintaining growth objectives. However, lower interest rates may upset savings and bank-deposit holders.
Others expect the RBI to hit the pause button on rate-revisions.
During the session, Acharya who himself had been a member of the MPC, observed, "my sense is that inflation is higher than what most people had thought."
He said the inflation targeting framework is a necessary aspect which gives confidence to the external investors about India's commitment, and as a country which depends on investment inflows, it is in India's interest to carry forward on the path.
He also opined that growth has remained a major objective in the MPC's recent assessments and termed it as a caveat in the contract between RBI and the government. "...you can't alter the primacy of the legal mandate that is given to you. You have to respect that. That's what democratic accountability is about," he said.
He also said, "In my view, what the MPC should take seriously is that you have a legal mandate. You are charged with maintaining a headline target rate of 4 per cent on Consumer Price Index inflation,"
Acharya who called himself as the poor man's Raghuram Rajan stepped down as the Deputy Governor of the Reserve Bank of India in a brief tenure. In the chat on Saturday, Acharya also highlighted the demands of re-privatisation as a massively failed experiement that served only political needs.
He said that the benefit from a labour perspective can be another motivation for the PSBs' continuing stature to be government run, saying they have become into "cosy enterprises". Such enterprises may also result in recapitalization exercises which are a drag on taxpayers money. Investments in state-run banks are pegged to have damaged the national exchequer by up to Rs 3.5 lakh crores according to Acharya.
However, he also observed that recapitalisation of banks and spending on infrastructure can help the battered economy during the present COVID-19 situation. He also added that the RBI's financial stability report can be utilised for assessing every bank's requirement.
There is also a need to review the potential rate of growth for the Indian economy, given the steady decline which the company has experienced every quarter in recent times, he said.
Acharya also said that the RBI should put in place a dedicated cadre for supervisory function the soonest.