The financial inclusion rises further in India, the incidence of disruptions in consumption are likely to wane, allowing monetary policy to remain focused on minimising inflation volatility, Reserve Bank of India (RBI) deputy governor Michael Patra said.

Patra observed that in India, the issue of financial inclusion and its role in shaping the monetary policy reaction function was recognized from the very outset while instituting the flexible inflation targeting framework. Accordingly, price stability was assigned primacy among the goals of monetary policy, with output being a secondary objective to turn to only after price stability as defined numerically in terms of 4% with a tolerance band of +/-2% around it has been achieved.

This has been largely achieved, but for the exceptional experience with the pandemic, and looking ahead, inflation is expected to trend down over the next two years to converge to the target, he said.


The deputy governor, in charge of the monetary policy department at RBI and a member of the monetary policy committee (MPC), argued in favour of targeting a gauge of inflation which includes food prices rather than one which excludes them, such as core inflation. Financial inclusion appears to be the lowest in rural, agriculture dependent areas where food is the main source of income, Patra said. Flexibly determined food prices have a critical role to play in influencing real wages and incomes of the excluded and hence their aggregate demand.

Interest rate change doesn’t matter so much.

When food prices rise, the extra income earned by the financially excluded is not saved but instead consumption is increased, leading to higher aggregate demand, Patra said, adding, The lower the level of financial inclusion, therefore, the stronger is the case for price stability being defined in terms of headline inflation rather than any measure of core inflation that strips out food and fuel.