Assessing current economic situation major challenge:RBI

In recent times, shifting trend growth in several economies, global spillover effects and disconnect between financial cycles and business cycles in the face of supply shocks broadly explain why monetary policy around the world is in a state of flux, Das said.

Reserve Bank of India (RBI) governor Shaktikanta Das (Reuters photo)

Reserve Bank of India (RBI) governor Shaktikanta Das on Friday said the assessment of the current economic situation is one of the major challenges for central banks. The precise estimation of key parameters such as potential output and output gaps on a real-time basis that are crucial for the conduct of monetary policy is a challenging task, Das said in his speech on Seven Ages of Indias monetary policy at St. Stephens College in Delhi.

In recent times, shifting trend growth in several economies, global spillover effects and disconnect between financial cycles and business cycles in the face of supply shocks broadly explain why monetary policy around the world is in a state of flux, Das said.

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Despite the challenges, a view has to be taken on the true nature of the slack in demand and supply-side shocks to inflation for timely use of counter-cyclical policies, he said.  To this end, Das said the central bank constantly updates its assessment based on incoming data and survey-based forward-looking information, which are juxtaposed with model-based estimates for policy formulation.

This approach helped the Reserve Bank use the policy space opened up by the expected moderation in inflation and act early, recognising the imminent slowdown before it was confirmed by data subsequently, Das said.

He observed the focus of financial stability has extended its reach to financial inclusion as well. The regulation and supervision of banks and non-bank financial intermediaries has rested with the Reserve Bank and has kept pace with the prescribed global norms over time. More recently, the focus of financial stability has not only confined to regulation and supervision, but also extending the reach of formal financial system to unbanked and unserved population, Das said.

The focus of the central bank is also on promoting secured, seamless and real-time payments and settlements. According to the RBI governor, the seven ages of monetary policy include the initial phase (1935-49), monetary policy in sync with the five-year plans (1949-69), credit planning (1969-85), monetary targeting (1985-98), multiple indicators approach (1998-2015), preconditions set for inflation targeting (2013-2016) and flexible inflation targeting (2016 onwards).

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