Interest rate actions by the Reserve Bank of India (RBI) alone cannot lower inflation and the burden is being shared with fiscal policy, Finance Minister Nirmala Sitharaman said on September 8.
Sitharaman also seemingly suggested that the RBI may not have to take as much action as central banks of developed countries to bring down inflation.
"The Reserve Bank will have to synchronise. It may not synchronise as much as developed central banks," she said while speaking at the Indian Council for Research on International Economic Relations conference on taming inflation.
"I am not prescribing anything to the Reserve Bank, I am not giving any forward direction to the central bank. But it is the truth - India's solution to handling the economy, part of which is handling inflation also, is an exercise where the fiscal policy together with monetary policy has been at work. It can't be singularly left to monetary policy, which has proved totally ineffective in many countries," Sitharaman said.
The finance minister's comments came on the back of a steep rate hike cycle by the RBI, with its Monetary Policy Committee (MPC) having hiked the repo rate by a massive 140 basis points to 5.4 percent in the last four months to fight elevated inflation.
India's Consumer Price Index (CPI) inflation eased to a five-month low of 6.71 percent in July. However, it has spent seven straight months outside the RBI's 2-6 percent tolerance range. The central bank is only two months away from failure, which occurs when the average inflation stays beyond the tolerance range for three consecutive quarters. Moreover, inflation has been above the medium-term target of 4 percent for 34 consecutive months.
In the event of a failure, the RBI must submit a report to the government detailing the reasons for the failure, the steps it plans to take to revert inflation to the target, and the time it thinks it would take.
Economists see another rate hike by the MPC at its next meeting later this month, with a terminal repo rate of around 6 percent expected to be reached by the end of 2022.
In her speech today, the finance minster said the Indian experience over the last couple of years had shown that the monetary policy, while key, was not enough to reduce inflation.
"India's experience in handling inflation depends so much on so many different factors. The central bank, its instruments, its interest rate management form a very critical part of it, but it cannot be the one and only one," she said.
The RBI has been cognisant of the role played by the government. On August 5, Governor Shaktikanta Das had said in his statement while announcing the MPC's decision that the government's supply-side interventions were expected to further bring down edible oil prices.
More broadly, external member Ashima Goyal noted in the minutes of the August 3-5 meeting that "coordinated fiscal and monetary policy action to reduce inflation while maintaining adequate demand has worked well".