March 2019
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Current Policy Issues Facing the Indian Economy

By Shaktikanta Das, Governor, Reserve Bank of India

Indian economy has witnessed an accelerated pace of domestic reforms in recent years. These reforms include, inter alia, the flexible inflation-targeting monetary policy framework, the Insolvency and Bankruptcy Code (IBC), the Goods and Services Tax (GST) and steps for enhancing foreign investments by liberalising the FDI regime and undertaking efforts to provide a conducive business climate.

First, let me talk about inflation. Maintaining price stability in the economy is a basic mandate for a central bank. Delivering low inflation by the central bank induces greater confidence among both domestic and global investors. India has witnessed significant disinflation since 2012-13 – with headline CPI inflation moderating from an annual average of 10.0 per cent in 2012-13 to 3.6 per cent in 2017-18 and 3.7 per cent in 2018-19 so far (April-December). As per the latest reading, headline inflation stood at a low of 2.2 per cent in December 2018.

The disinflation was marked by the commitment of the Reserve Bank to bring down inflation in a sequential manner – to 8 per cent by January 2015, 6 per cent by January 2016 and 5 per cent by Q4 of 2016-17 – which was called the glide path for inflation. This, in turn, paved way for the formal adoption of flexible inflation targeting (FIT) through a legislative amendment to the Reserve Bank of India (RBI) Act under which price stability has been mandated as the primary objective of monetary policy, while keeping in mind the objective of growth. Price has been defined in terms of a numerical CPI inflation target set by the government at 4 per cent with a tolerance band of ± 2 per cent. With the formal setting up of a Monetary Policy Committee (MPC), there has been a shift to a committee-based approach for determining the monetary policy. This has enhanced transparency and accountability of the decision making process.

Since the adoption of flexible inflation targeting in India, inflation has been reasonably range bound within the target band. I must add here that easing of global crude oil prices also augured well for our inflation outcomes.

We all know that Indian banking sector had emerged largely unscathed in the aftermath of the global financial crisis. However, headwinds from international and domestic economic developments posed challenges to the banking sector in recent years. Indian banking system is on the cusp of a transformation, aided by recent policy measures to reduce vulnerabilities and improve its financial health.

Several initiatives are underway to strengthen the regulatory and accounting frameworks aimed at increasing the resilience of the institutions. The Reserve Bank’s initiatives in the recent period are aimed at ensuring better and timely recognition of stressed assets, sufficient provisioning and an efficient resolution process. Recent supervisory data suggests that these efforts are bearing some results and incipient signs of improvement in asset quality of banks are emerging. After reaching a peak of 11.5 per cent in March 2018, the gross non-performing asset ratio improved to 10.8 per cent in September 2018. As per the current assessment of the Reserve Bank, the ratio may further improve to 10.3 per cent by March 2019.