Former Reserve Bank of India (RBI) Deputy Governor Viral Acharya has said the regulator should focus on inflation over growth at its August policy meet.
The apex bank's Monetary Policy Committee (MPC), headed by Governor Shaktikanta Das, is scheduled to meet for three days, from August 4 to August 6.
Acharya stated that since inflation is higher than expected, the rate setting panel should concentrate on controlling price rise at the meeting.
His comments came amid rising clamour for further rate cuts to help boost the economic recovery, even as headline inflation crossed the 6 per cent level in June. This inflation level is beyond the comfort of RBI, which has been tasked with keeping it at 4 per cent in the medium term with a 2-percentage points leeway on either side.
While many analysts expect a rate cut of 0.25 percent to accommodate growth, some have opined that the price rise situation may result in the RBI going for a pause.
"In my view, what the MPC should take seriously is that you have a legal mandate. You are charged with maintaining a headline target rate of 4 per cent on Consumer Price Index inflation," Acharya said during a chat hosted by Bhavan's SPJIMR.
He said growth, which has dominated the decisions in recent times, is only a secondary objective for the MPC and termed it as a caveat to the contract between RBI and the government.
"...you can't alter the primacy of the legal mandate that is given to you. You have to respect that. That's what democratic accountability is about," he added.
Acharya, who went back to teaching at a B-school in New York after resigning from the RBI last July, said he is not up to date with the latest inflation models and forecasts and also added that getting data has been difficult over the last six months.
"My sense is that inflation is higher than what most people had thought," Acharya, who had himself been an ex-officio member of the MPC, said.
He said the inflation targeting framework is a necessary aspect which gives confidence to external investors about India's commitment, and as a country which depends on investment inflows, it is in India's interest to carry forward on the path.
He reiterated the demand for "re-privatisation" of the state-run lenders, calling the 1969 move as a "massively failed experiment" which has also only served the political needs.
Acharya said the benefit from a labour perspective can be another motivation for the PSBs' continuing stature to be government run, saying they have become into "cosy enterprises".
However, taxpayer money is being wasted on repeated recapitalisation exercises, Acharya said, pegging the loss to the national exchequer on its investments in the state-run banks at up to Rs 3.5 lakh crore as compared to the same amount of money being invested in the 50-share Nifty benchmark or the sectoral indices for private sector banks.
There is a need for the government to come out with a revised fiscal deficit road map number for the medium term to establish its credibility and seriousness, he said, adding that this is a specific need told by rating agencies as well.
In the present COVID-19 situation, recapitalisation of banks and spending on infrastructure can help the battered economy, he said, adding that the RBI's financial stability report can be utilised for assessing every bank's requirement.