MUMBAI: The RBI has said that deeper financial inclusion, which helps shape monetary policy, will give the central bank more headroom to focus on reducing inflation volatility.
RBI deputy governor Michael Patra said on Friday that the financial inclusion, as measured by RBI’s FI-Index — has only recently crossed the halfway mark of the RBI’s goal of 100 or full financial inclusion. The index measures inclusion using 97 indicators that represent access, usage and quality of various financial services. “We have passed the halfway mark, doing best in access or the supply of the financial infrastructure, and lagging the most in usage or demand to be financially included,” said Patra. He was speaking on how financial inclusion empowers monetary policy at an IIM-Ahmedabad event.
“Financial inclusion in the sense of access to the formal financial system for basic financial services at a reasonable cost is now positioned as a policy objective in more than 60 countries. Financially included economic agents appear to be able to ride out interest rate cycles pro-cyclically instead of being impacted counter-cyclically,” said Patra.
According to Patra, an economy with all consumers financially included would expect to experience less output volatility due to lower consumption volatility. “In an economy with financially excluded consumers, monetary policy has to assign a greater weight to stabilise output,” said Patra. Incidentally, Patra, who is a monetary policy committee (MPC) member, in a recent paper had indicated that policymakers would have room to tolerate inflation and keep money easy as long as the output gap remains negative.
Patra said that the RBI’s response to the pandemic was to reach out in the form of unconventional measures to afflicted sections of society, keeping finance flowing, and financial institutions and markets functional, especially when personal incomes were lost and the future was highly uncertain.
“In the final analysis, financial inclusion fosters societal intolerance to inflation, a social preference for macroeconomic stability and a sense of the long and variable lags with which monetary policy operates. This makes it possible for smaller monetary policy actions to achieve the same goals in a shorter period,” said Patra.
RBI deputy governor Michael Patra said on Friday that the financial inclusion, as measured by RBI’s FI-Index — has only recently crossed the halfway mark of the RBI’s goal of 100 or full financial inclusion. The index measures inclusion using 97 indicators that represent access, usage and quality of various financial services. “We have passed the halfway mark, doing best in access or the supply of the financial infrastructure, and lagging the most in usage or demand to be financially included,” said Patra. He was speaking on how financial inclusion empowers monetary policy at an IIM-Ahmedabad event.
“Financial inclusion in the sense of access to the formal financial system for basic financial services at a reasonable cost is now positioned as a policy objective in more than 60 countries. Financially included economic agents appear to be able to ride out interest rate cycles pro-cyclically instead of being impacted counter-cyclically,” said Patra.
According to Patra, an economy with all consumers financially included would expect to experience less output volatility due to lower consumption volatility. “In an economy with financially excluded consumers, monetary policy has to assign a greater weight to stabilise output,” said Patra. Incidentally, Patra, who is a monetary policy committee (MPC) member, in a recent paper had indicated that policymakers would have room to tolerate inflation and keep money easy as long as the output gap remains negative.
Patra said that the RBI’s response to the pandemic was to reach out in the form of unconventional measures to afflicted sections of society, keeping finance flowing, and financial institutions and markets functional, especially when personal incomes were lost and the future was highly uncertain.
“In the final analysis, financial inclusion fosters societal intolerance to inflation, a social preference for macroeconomic stability and a sense of the long and variable lags with which monetary policy operates. This makes it possible for smaller monetary policy actions to achieve the same goals in a shorter period,” said Patra.
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