Former RBI Governor Says Softer Inflation In India Gives Way To Support Indian Economy

The former governor of Reserve Bank of India Bimal Jain said on Tuesday that softer inflation in the country puts the central bank in a state of supporting economic growth. 

“We are in a very good situation so far as inflation is concerned,” said Jalan who lead the RBI between 1997 and 2003. 

“There is some uncertainty about the rate of growth. That needs to be strengthened.”

New RBI Governor Shaktikanta Das surprised economists by easing monetary policy in February, and data since then suggests Asia’s third-largest economy could do with some more stimulus. Economic growth slowed to 6.6 percent in the three months through December as political uncertainity ahead of a general election compounded challenges posed by weak domestic demand and a global slowdown.

At the same time inflation remains benign and well below the RBI’s medium-term target of 4 percent, stoking expectations for back-to-back rate cuts at the April 4 policy meeting. Jalan declined to comment specifically on what the RBI should do at that meeting or on other policy settings.

Jalan said the RBI should decide how much it can do to facilitate credit flow and investment in the economy, given global risks and elections at home.

The former governor currently heads a central bank-appointed panel, which is studying how much of the RBI’s surplus capital can be transferred to the government.

He declined to discuss the panel’s deliberations, saying “our report will be sent to the RBI next month and they will decide what needs to be done.”

Dividend Pressure

The RBI pays a dividend to the government every year from the profit it earns from investments, the printing of banknotes and other operations, while retaining a small portion as capital reserves. The government estimates the central bank holds at least 3.6 trillion rupees ($52 billion) more capital than it needs, with finance ministry officials suggesting last year that the money can be used to bolster weak state banks.

The government’s pressure was opposed by the RBI under its previous Governor Urjit Patel, who quit abruptly in December following a public spat with the state over the central bank’s autonomy. Das, a former bureaucrat, is seen as an ally of Prime Minister Narendra Modi.

“The use should be for the government to decide,” Jalan said, when asked if the transfer of the funds should be conditional.

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