Monetary policy is financially inclusive by design, says Patra


India’s monetary policy is financially inclusive by nature and the benefits of such a strategy will be visible in the future, Reserve Bank of India (RBI) deputy governor Michael Patra said on Friday.

“India’s monetary policy is by nature financially inclusive, and it will reap the benefits of this strategy in the future in terms of efficiency and maximization of welfare,” Patra said at an event hosted by IIM Ahmedabad.

Financial inclusion appears to be lowest in rural areas dependent on agriculture where food is the main source of income, he said, adding that when food prices rise, the additional income earned by people. the financially excluded is not spared, but consumption increases, which leads to higher aggregate demand.

“In this kind of situation, the effectiveness of monetary policy in achieving its stabilization objective is increased by targeting a price measure that includes food prices rather than one that excludes them as core inflation. Therefore, the lower the level of financial inclusion, the more the case for price stability is defined in terms of headline inflation rather than in terms of a measure of core inflation that excludes food and fuel, ”he said. In India, food accounts for 46% of the Consumer Price Index (CPI), among the highest shares in the world. In addition, the CPI combines a rural index and an urban index, the share of the food being even higher in the rural index at 54.2%.

“It is against this background that the overhaul of the monetary policy framework in 2016 to inaugurate a flexible inflation targeting regime wisely chose the headline CPI as the measure of the inflation target rather than the entire inflation target. measure of core inflation, despite convincing arguments in favor of the latter which are still being made today, ”he said.

Stabilizing farm incomes and food availability during the pandemic through cash and in-kind transfers has been a key political mission, Patra said. Coincidentally, financial inclusion appears to have increased, he said, with the level of RBI’s Financial Inclusion Index rising from 49.9 in March 2019 to 53.1 in March 2020 and to 53.9 in March 2021.

“The responsibility assigned to monetary policy is to keep production close to or at potential and inflation on target. Financially included consumers are able to smooth their consumption in the face of shocks due to their access to savings (deposits) and credit from the formal financial system in the event of loss of income, ”he said.

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