A new report by the State Bank of India (SBI) reveals that India outperformed advanced economies like the USA, France, and Germany in successfully managing inflation. The report credits the combined efforts of the government, the Reserve Bank of India, and banks in strengthening policy transmission and inflation management over the past ten years, behind this positive outcome. From 2021 to 2024, India demonstrated nominal deviations from its inflation targets, surpassing other global economies in the West grappling with higher inflation rates. The report emphasizes that this successful outcome is mostly attributed to the integration of monetary and fiscal policies, specifically during the pandemic, which aided the maintenance of price stability and placed India at the top amongst its global peers. The credit mostly goes to RBI, which has been capable of maintaining economic stability and keeping inflation in check through an amalgamation of various innovative monetary policies, strict regulatory measures, and a complaint approach.
Let us understand the role of RBI in India’s landmark feat.
Thanks to RBI’s Inflation Targeting Framework introduced in 2016 for India’s successful tackling of inflation. The framework secured inflation expectations and amplified the credibility of monetary policy by setting a direct inflation target of 4% with a tolerance band of +/- 2%. By pledging to these targets, the RBI has presented a transparent roadmap for economic stakeholders. This in turn aided in the stabilisation of prices.
The policy repo rate- the rate at which commercial banks borrow from RBI, underwent an adjustment under this framework, thus acting as a vital tool in inflation management. In times of rising inflation, the RBI providently pushed up the repo rate as a deterrent to excessive spending and borrowing. This in turn dampened the demand-side pressures on prices. For example, in 2022, when global inflation was towering due to supply chain disruption following geopolitical tensions, the repo rate was promptly increased multiple times by the RBI, touching down to 6.5% by the beginning of 2023. Unlike in the USA, where related rate hikes were delayed, which led to longstanding high inflation levels, India, with this timely intervention, could prevent inflation from skyrocketing out of control.
RBI’s impressive management of liquidity in the financial system too has played a significant role in curbing inflation. The amount of money the banks hold in their reserves has been stringently monitored by the RBI through the employment of tools like the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR), thereby regulating the overall supply of money. Through the calibration of these ratios based on inflationary trends, The RBI has effectively cushioned additional liquidity that might have otherwise powered inflation.
(Image Credit: moneycontrol)
Furthermore, the RBI’s Open Market Operations (OMO) mechanism has played a vital role in maintaining liquidity balance. The amount of money being circulated in the economy can be directly influenced by the RBI through the buying and selling of government securities. For example, during the pandemic, the RBI purchased securities, which in turn imbued necessary liquidity into the economy to shoulder growth. As inflationary pressures gradually surfaced, the RBI, through a very prudent reversed approach, sold securities to account for excess liquidity and keep inflation in check.
This proactive approach has facilitated the RBI to strike a discreet balance between supporting economic growth and controlling inflation, a move that many Western central banks have struggled to achieve.
Fluctuations in global oil prices led to imported inflation, which posed a unique and severe challenge to India. To alleviate this, the RBI has assiduously stepped in the foreign exchange market to stabilize the Indian rupee. Dollars from RBI’s foreign exchange reserve, which were worth around $560 billion in 2024, were sold, which resulted in the prevention of an uncurbed devaluation of the rupee. Had this approach been not taken, the falling Indian rupee would have made imports more expensive and fueled inflation.
In contrast to this, advanced Western economies like the US and the Eurozone were often seen taking a more noninterventionist approach towards exchange rate management, mostly counting on market forces. However, the RBI’s active intervention has allowed it to safeguard the domestic economy from some of the inflationary pressures emerging from global markets, providing a bulwark that has proven vital in times of global economic instability.
As global economic challenges continue to thrive, the RBI’s exemplary dynamic, focused, and flexible monetary policy acts as a valuable framework for other nations facing inflationary turmoil.
