RBI needs to become an all-rounder once again: ​Nilesh Shah

Nilesh Shah, MD, Kotak AMC, said that the Reserve Bank of India (RBI) needs to become an all-rounder once again and manage inflation, government’s borrowing programme, Indian currency and financial system while supporting growth. Edited excerpts from an interview.

Would bond markets be happy after the RBI Governor's statement or would they be wary because good times like this cannot last?
I think RBI’s current policy is in continuation of the several steps taken during the last six months. It is pro-growth. There is ample liquidity but no lending happening materially, despite several credit guarantee schemes. The capacity utilisation is extremely low and yet inflation is high. So there are several challenges which RBI is grappling with and they have decided to have a pro-growth policy.

At one point, the European Central Bank was lauded for targeting inflation. Today they are pumping liquidity and not bothered about inflation. The Reserve Bank of New Zealand was the first central bank in the world where the governor’s pay was linked to achieving inflation targets, and now they have abandoned that. I think the Reserve Bank of India needs to go back to an all-rounder role of managing inflation, supporting growth, managing government’s borrowing programme, managing Indian currency and financial system. Narrowing RBI to just focusing on inflation will be not a right step.

We have taken the path of inflation targeting without even having a clear definition of inflation, where WPI inflation is way below RBI’s target level. The CPI inflation today has components which is highly volatile like food, fuel, gold. Core inflation, excluding food, fuel, vegetables, 'paan'-tobacco kind of sin products and gold, is well within RBI’s comfort zone. We need to understand that by raising Indian interest rates we are not going to influence global oil prices. Today, we need growth and the RBI has taken several steps to support growth. For 3-6 months, if we let go inflation, which is more of a supply side issue, then probably it will be positive for the overall economy. We will always have opportunities to bring back inflation under control at a later date.