Emerging market economies are on a stronger footing now, warding off the spillovers of monetary tightening in the West, he said, showcasing India’s synchronised monetary and fiscal policymaking that helped overcome supply-side bottlenecks.
“Macroeconomic models used by central banks so far have mainly focused on the demand side of the economy,” Governor Shaktikanta Das told the 59th South East Asian Central Banks Governors’ Conference held in Mumbai. “Enough emphasis was not given on supply side factors. A better understanding of the supply side of the economy has become very important for conducting monetary policy more effectively.”
For decades, emerging economies were just aping the developed ones when it came to monetary policies. But when inflation accelerated post the weakening of the spread of pandemic, emerging market central banks, especially India, broke from the rest to chart their own course. Even during the early days of the pandemic, EMs did not spend their way to recovery pushing up the fiscal deficit.
“The resilience of emerging market economies (EMEs), in particular, stands out unlike previous episodes of volatility which saw EMEs at the receiving end,” said Das. “EMEs have probably learnt from their past experience and played it well this time.”
Das said India’s coordinated policy response during this period can be a good template for the future.”While monetary policy worked on anchoring inflation expectations and quelling demand-pull pressures, supply side interventions by the government alleviated supply-side pressures and moderated cost-push inflation. Effective fiscal-monetary coordination was at the core of India’s success,” he said.He called for global cooperation and coordination to address the multiple challenges the world economy is facing today.
“Collaboration is not an option but a necessity. We need greater resolve and coordination to make significant progress in dealing with global challenges,” he said.
Green financing may be the flavour of the season, but policy makers have to be aware of the potential pitfalls. “There is a need to enhance green capital flows to EMEs,” he said. “At the same time, we have to be mindful of potential financial stability implications of green transition.”
He also stressed on agreements on a “critical minerals corridor” and a “food corridor” for safeguarding food security. In the face of a series of adverse shocks since 2020, the emerging economies fared well in comparison to their response to the previous shocks, due to the strengthening of prudential regulations, improvements in supervisory practices and the improved macroeconomic fundamentals.
On digital public infrastructure, Das said India’s Unified Payments Interface (UPI) can become a critical part of global public good when scaled up beyond national boundaries. “The linkage of Indian UPI and the fast payment systems of a few other countries drives home the potential of the UPI to become an international model for cross-border payments,” he said.
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