Inflation management: RBI should be ‘more synchronized” with fiscal policy, says FM Sitharaman

Virendra Pandit

New Delhi: Finance Minister Nirmala Sitharaman said on Thursday that inflation management could not be left to the monetary policy alone, and the Reserve Bank of India (RBI) should be more synchronized with the fiscal policy and other factors in taming inflation.

Monetary policy has proved totally ineffective in many countries, she said at a seminar organized by the economic think-tank, Indian Council for Research on International Economic Relations (ICRIER).

“The RBI will have to synchronize somewhat, maybe not as much synchronized as other western developed countries would do. I’m not prescribing anything to the Reserve Bank… I’m not giving any forward direction to the RBI, but it is the truth that India’s solution to handling the economy, part of which is handling inflation also, is an exercise where the fiscal policy, together with the monetary policy, has to work,” she said.

In some economies, they design the policy in such a way that monetary policy and interest rate management become the one and only tool to handle inflation, she said.

“I would say India’s inflation management, the word taming inflation or the word keeping it within the tolerance limit is an exercise of so many activities and most of which is outside of the monetary policy in today’s circumstances,” the FM said.

In an earlier era, some people would have thought it sacrilegious for the finance minister of a country to say so, she said.

India’s inflation management encompasses many processes that are outside of the remit of the monetary policy, even in today’s circumstances. Therefore, to effectively manage inflation, monetary and fiscal policies must work in lockstep, Sitharaman said.

India’s Consumer Price Index (CPI)-based inflation in July was the lowest in five months, aided by cooling global commodity prices and lower food prices domestically, but was still above the Monetary Policy Committee’s medium-term target, thus justifying the recent monetary tightening by the RBI.

Sitharaman said India’s decision to buy discounted crude oil from Russia was part of its inflation management policies.

“Our entire import from Russia was probably 2 percent or sometimes even lesser of the total. They ramped it up to almost 12-13 percent within a couple of months,” she said, adding that other countries like Japan and Italy are also buying Russian crude despite sanctions.

The finance minister said that states will also have to do their bit to reduce prices at a local level. The states which did not cut their duties and taxes on petrol and diesel now have inflation higher than the national average.

“If the states’ inflation is also to be attributed to the Government of India, we need to have a way in which we work together to handle inflationary matters,” Sitharaman said.

“It cannot be that inflation is handled only by the Centre. And when states don’t take enough steps, that part of India suffers from want of relief from the stress of inflation. The exogenous factors affect both the Centre and states,” Sitharaman added.