Monetary policy alone can’t tame inflation: FM

In a barely veiled signal to Mint Street, Finance Minister Nirmala Sitharaman said on Thursday that monetary policy tools like interest rate increases deployed by several central banks would not suffice to cool inflation and suggested that the Reserve Bank of India need not synchronise its actions ‘as much’ with its counterparts in developed countries. 

While monetary policy as a solution for containing inflation had been considered ‘sacrosanct’, the minister indicated that growth needed attention too, while countries that had been exponents of the monetary policy theory that only increasing interest rates could rein in inflation, had been totally ineffective in managing price rise, Ms. Sitharaman said. 

“Why does one country in that network have a 79% [inflation] and why [does] some country, which is the fountainhead of such theory, have the highest inflation in 40 years,” she asked rhetorically. “Why would other members of that clique of nations also [be looking] at 8%-9% [inflation],” she wondered. 

India’s experience in handling inflation showed that many different factors needed attention and while the central bank and its instruments like interest rates form a ‘very critical part of it’, they could not be the only one, the minister observed.  

“I say it with a sense of responsibility… yes, it is one of the tools, but sometimes, for instance in India, if you were to leave the policy makers and talk to people on the ground, they would say, particularly in the situation we are in now, where economic growth would have to be unfettered,” she said. 

“The Reserve Bank (of India) will have to synchronise somewhat, may not be as much synchronised as the other western developed countries would do. I am not prescribing or giving a forward direction to the RBI, let me be careful here,” she said at an ICRIER meet on ‘Taming Inflation’.   

“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 and monetary policy have to work together. It can’t be singularly left to monetary policy which has proved totally ineffective in many countries whose structure, whose economy’s profile forms the basis of monetary policy theory to rivet everything on interest rate and say that’s the one and only potent tool to manage inflation,” Ms. Sitharaman asserted. 

“India’s inflation management is an exercise of so many different activities, majority of which are outside the monetary policy in today’s circumstances,” Ms. Sitharaman said, stressing that such an assertion from a country’s Finance Minister would have been considered ‘sacrilegious’ earlier. 

“My experience says, if you are able to equally attend to several other factors, for which I give credit to all governments earlier, because they also kept evolving the way the supply side is managed, how the bulk of the population get all the necessary goods at an affordable price,” she said.