RBI's Increasing Fiscal Support Deserves a Closer Look

The central bank's rising dividend payouts come at a cost that must not be overlooked

- AJIT RANADE

The Reserve Bank of India's (RBI) primary job is to protect the value of the rupee: i.e., domestic price stability. Since the 2016 pact between the central bank and the government, this responsibility was codified as a specific inflation mandate. It is called 'flexible inflation targeting,' since the target is not a number, but a band of 2-6%. RBI is bound by it and answerable to Parliament if it deviates. The pact was renewed in 2021 for another five years.

This monetary reform has stood India in good stead. To be fair, India's inflation management was much better than that of most developing countries, especially in Latin America and Africa, even before the formal inflation-targeting regime was put in place. There have been no episodes of runaway inflation or sustained bouts of hyperinflation. Credit for this should go largely to RBI and also to the political system, which has been sensitive and responsive in taking corrective action against rising price levels.

Even as RBI manages monetary policy within the inflation-targeting framework, it is not a central bank with a single mandate. Among other things, it has to ensure adequate availability of credit, manage foreign exchange rates and reserves and exercise a vigil on financial sector stability. How much weightage each of these objectives is assigned and the trade-offs involved in RBI policies are matters of conjecture.