Shaktikanta Das: Price and financial stability - managing complementarities and trade-offs

Plenary address by Mr Shaktikanta Das, Governor of the Reserve Bank of India, at the Kautilya Economic Conclave, organised by the Institute of Economic Growth and Ministry of Finance, Government of India, New Delhi, 20 October 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

I am delighted to be back at the Kautilya Economic Conclave, 2023. This event is emerging as a leading forum for well-rounded discourse on economic and other policy issues of contemporary relevance. I am sure the eminent gathering here will contribute richly to the discussions on issues and challenges that confront us today and tomorrow.

In the opening line of my latest Monetary Policy Statement on October 6, 2023, I had referred to Kautilya's emphasis on stability in the macroeconomic context. I now propose to share my thoughts on managing the complementarities and trade-offs associated with price and financial stability. I also propose to touch upon the policy mix to achieve these desirable goals, and our experience in dealing with these issues in India. Evidently, the choice of this topic draws inspiration from the nomenclature of this economic conclave.

But let me first begin by commenting on the current global context. The global economy is facing a triad of challenges – (i) slow moderation in inflation which is getting interrupted by recurring and overlapping shocks; (ii) slowing growth, and that too, with fresh and enhanced obstacles; and (iii) lurking risks of financial instability. Central banks with price stability as their primary objective have raised policy rates aggressively, while signalling to keep rates higher for longer. Some of them have taken a pause on rate hikes. Financial stability concerns along with other factors, have conditioned this pursuit, following the recent banking sector turmoil in some advanced economies. Financial markets have become highly sensitive to every piece of new information. Policy making has become extraordinarily complex amidst such confluence of factors. Increasingly, central bankers face tensions between doing too little or doing too much. While several central banks may prefer the prudence of overkill, somewhat embodied in higher for longer policy stances, financial instability risks rise up to restrain them. With every shock such as the recent simultaneous surge of crude oil prices, bond yields and the US dollar, additional dimensions of policy dilemma present themselves and hamstring their responses.

In such a situation, conflict may arise between the requirements of price and financial stability, but policymakers have to deftly tread a fine balance, as it is important to recognise that price and financial stability reinforce each other in the medium to long term. Stability is the foundation of sustained progress. As Kautilya explained long ago: "Which is preferable – an immediate small gain or a large gain in the future? A large gain in the future is preferable if it is like a seed yielding fruit in the future."Against this background, let me start with the evolution of the idea of price and financial stability in the global context.