Viral Acharya criticised the RBI’s digital currency and its implementation
by Auhona Mukherjee | November 17, 2023
The Reserve Bank of India (RBI) is making a “cognitive mistake” in its inflation targeting and should hike the key rate to keep price levels in check, the former Deputy Governor, Viral Acharya, said.
Acharya thinks the Monetary Policy Committee (MPC) should have prioritised controlling inflation and hiked rates in the recent monetary policy committee announcements. The RBI’s inflation target is 4% with a tolerance band of 2-6%.
The current MPC considers an inflation rate of 4-6% to be acceptable, but the goal should be to keep it within the 2-4% band, said Acharya. The committee has reinterpreted the target and experts have accepted this change, he said.
The Consumer Price Index (CPI), which shows retail inflation, was 5.02% in September, and above the mandated levels at 6.83% in August and 7.44% in July. The MPC still kept the repo rate unchanged at 6.50% in the last four sessions to maintain the growth target.
“You can’t change your goal post in a race because the going gets a little hard,” said Acharya, who is currently a professor of Economics at New York University. “You can’t say I’ll just run 5 miles instead of 10 miles. Okay, that’s a way out but it doesn’t make you a good 10-mile runner.”
If the 4% inflation target is not met in the short run, we will miss both our inflation and growth targets in the long run, said Acharya. The next meeting of the MPC will be held on 6-8 December.
India’s growth has been lopsided with the gap between the rich and the poor widening, said Acharya. India cannot “have consumption grow 7-8% year after year for the same set of people,” he said.
Acharya said the RBI should use the Central Bank Digital Currency (CBDC) for financial inclusion instead of large transactions such as call money market and foreign exchange transactions.
The RBI launched the wholesale pilot for the digital rupee in November 2022 and the retail pilot in December 2022. The central bank has reportedly been pushing for payments using CBDC in the interbank or call money market.
“I don’t see much of a logic for a CBDC in India,” said Acharya. “India has a great payments mechanism already.” Companies prefer to use other methods that help them maintain secrecy, said Acharya.
RBI Governor Shaktikanta Das advocated for the use of CBDC in cross-border payments in his keynote address at the G20 TechSprint Finale, organised by the RBI and the Bank for International Settlements (BIS) in September.
In 2018, Acharya had asked the government to respect the independence of the RBI. He resigned from his post as RBI deputy governor in 2019, six months before his term ended.