Shaktikanta Das: Inaugural address - Annual Research Conference of
the Department of Economic and Policy Research
Inaugural address by Mr Shaktikanta Das, Governor of the Reserve Bank of India, at
the Annual Research Conference of the Department of Economic and Policy Research,
Reserve Bank of India, Hyderabad, 19 November 2022.
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I am delighted to be here with the economists of the Reserve Bank to inaugurate the
annual research conference of the Department of Economic and Policy Research
(DEPR). This conference is being held after a gap of more than three years. While I
have been regularly interacting with many of you individually or in groups to discuss
various issues, this is the first time that I am addressing all of you at one place.
2. The economics profession today faces one of its toughest times as the global
economy has been hit by multiple shocks one after the other. These shocks have led to
(i) globalisation of inflation, with advanced economies (AEs) facing multi-decadal high
inflation; (ii) sustained slowdown in economic growth and trade, together with rising
concerns about a possible global recession; (iii) deteriorating global food and energy
security situation; (iv) realignment of global supply chains and policy-induced
deglobalisation; and (v) and weakening influence of multinational institutions in
providing coordinated solutions to address global problems. Emerging market
economies (EMEs) face an additional challenge from threats to their external sector
stability.
3. Central banks, given their mandate on preserving macro stability, and the
responsibility to be at the forefront of managing an economic crisis, have a culture of
diligently building synergies between research and policy making. Research
departments are thus empowered to work as the workhorse and as the think tank for
ensuring continuous supply of reliable processed information, analytical research and
new ideas. Such ideas help in designing time and state relevant policies. Rapid
advancement in technology has brought with it an avalanche of data. The research
department's role is to quickly process these data and derive meaningful inferences of
relevance to policy making. I am extremely happy that the research department of the
Reserve Bank has been successfully adapting to these evolving challenges, providing
high quality research inputs on issues covering all key functions of the Bank and
multiple dimensions of the economy. The department has also been contributing to the
greater public good by joining and guiding public discourse on key policy issues through
its research reports and other publications.
4. In my remarks today, I would like to cover three important areas which touch upon
the vital role of the research department in a central bank. First, I would like to talk
about the challenges to our policy making in the context of the developments in the
recent years, both global and domestic, that warranted robust data and research
support. Second, I would highlight some of the important contributions of the research
department in these turbulent times. Third, I would lay out several challenges ahead
that one could anticipate, requiring reimagination and rebalancing of the research
function within the Reserve Bank.
I. Recent Challenges in Policy Making and Research Issues
5. Given the enormity of the multiple shocks, the world before the pandemic appears to
have become a distant memory, but I would like to start with a brief account of the key
policy issues we were grappling with in the pre-pandemic period. The global growth
momentum was losing steam and domestically we were experiencing a slowdown in
growth. The key challenge was to understand the reasons behind the observed decline
in growth and propose structural reforms and other policy changes. Domestic inflation,
on the other hand, was brought down, averaging 3.9 per cent during the flexible inflation
targeting regime (June 2016 to February 2020). The research issue then was what
factors contributed to the decline in inflation. Another important policy challenge was the
uncertainty about the time it would take to complete the balance sheet repair process
(or, the twin balance sheet problem of corporates and banks), and its ramifications for
growth and financial stability. Globally, some of the empirical puzzles that received wide
attention at that time were the weakening influence of economic slack on inflation (or,
whether the Phillips curve is dead) and little risk to inflation from quantitative easing (or,
the missing inflation conundrum). Widespread discontent about the negative spillover
effects of globalisation had resulted in a growing shift towards protectionist policies,
challenging the prevailing wisdom of greater openness to maximise economic welfare.
6. Since March 2020, three major shocks - the COVID-19 pandemic, the war in Europe
and the aggressive tightening of monetary policy across countries - have posed very
different set of challenges for economic research. Policy responses had to be swift and
wide ranging to contain the adverse effects on the overall macro-financial conditions as
well as sectoral vulnerabilities. The first major challenge was data collection during the
first wave of the pandemic, and the associated statistical break in data. During the
second wave of the pandemic, which was more lethal, collecting information on sector
level stress became even more important for designing targeted policy interventions.
The crisis thus created the opportunity to explore and harness the power of Big Data,
and strengthen direct feedback mechanisms while working from home.
7. The pandemic also posed new research issues and analytical challenges for policy
making. These include: (i) whether the pandemic caused a demand shock or a supply
shock, and which shock was transitory and which one durable; (ii) the size and nature
of policy stimulus required, and their effectiveness; (iii) the relationship of national
/localised lockdowns and vaccination with economic activity; (iv) the extent and nature
of supply chain disruptions and its impact on inflation and growth; (v) the asymmetric
impact of the shock/pace of recovery between contact-intensive services and
manufacturing and agriculture; and (vi) the impact of the shock on household, corporate
and financial sector balance sheets. Inflation and growth projections for monetary policy
needed wider consultations with stakeholders and experts and use of survey-based
data. Generation of alternative nowcasts using Artificial Intelligence (AI) and Machine
Learning (ML) techniques also gained more importance.
8. The war in Europe brought with it new challenges, just when the economy was about
to normalise fully despite the third wave of the pandemic. Suddenly, the world
encountered a severe food crisis and an energy crisis. A new risk emerged in the form
of fragmentation of the global economy driven by fast changing geopolitical
considerations, that brought to the fore the need for reducing dependence on any single
source for critical supplies. Commodity prices skyrocketed and supply chains knotted
further. These factors led to globalisation of inflation and policy makers were presented
with a new set of research issues - understanding the magnitude and likely persistence
of these shocks, the transmission channels of these shocks and the effectiveness of
alternative policy tools. As countries took recourse to trade policy measures (tariff and
non-tariff) and fiscal measures (price freeze, tax cuts and subsidies to the vulnerable),
the suitability of such measures in the Indian context also required focussed research
attention.
9. As inflation in systemically important AEs turned out to be persistent rather than
transitory, the third shock emanated in the form of aggressive tightening of monetary
policy by the US Fed, and subsequent unrelenting appreciation of the US dollar.
Spillovers to EMEs, and to India, were in the form of capital outflows, depreciation
pressures on currencies, reserve losses and imported inflation. Synchronised tightening
of monetary policy globally has progressively increased the risk of a hard landing, i.e., a
recession to tame inflation. India is, however, differently placed. Age old research
issues for EMEs like external sector sustainability assessment, feasible range of policy
options to preserve sustainability, and analysis of their effectiveness have once again
come to the forefront, more so because the nature and size of the spillover risk is very
different now.
10. While I have presented some of the major policy challenges for us in the recent
years, let me also talk about how the research department of the RBI has responded to
these challenges. In the usual academic environment of a university or a research
institute, it is much easier to assess the impact of research done by the staff by
aggregating data on published research output, downloads, citations, and impact factor
to give authors and organisations a score. In contrast, it is always hard to track in
quantifiable terms the utility and impact of policy research undertaken in central banks,
a major part of which is used internally and not published. I take this opportunity to
place on record my appreciation of the excellent work done by the DEPR in these
turbulent times. Your research inputs have been very valuable in shaping several of our
policies and actions.
II. Contributions of DEPR and its role as a think-tank
11. For a full-service central bank like the RBI, its research function is all
encompassing. Accordingly, the research department has a structure to be able to meet
both the immediate as well as the strategic and policy research requirements. It has
trained researchers, who not only specialise in specific areas, but also respond to the
challenge of working on any issue of immediate relevance. Teamwork helps in pooling
the comparative advantage of each, and a robust internal peer review process ensures
reliability and quality of research inputs before their use in policy formulation.
12. As noted earlier, standard models, information collection systems and analytical
frameworks used before COVID-19 became inadequate to deal with the complex
dynamics associated with multiple shocks that hit the economy. Forecasting
macroeconomic outcomes - crucial for conducting forward-looking monetary policy
because of the usual lags in transmission - required a revamped approach. This
involved strengthening the networks for direct collection of information from key
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stakeholders , greater reliance on survey-based information, wider use of AI/ML
techniques, and new/modified models to capture changes in the behaviour of economic
agents to different shocks facing the economy. A full information system, with about 70
high frequency lead/coincident indicators of the economy and use of state-of-the-art
models to capture the time-varying dynamics helped us to generate results that passed
the tests of robustness.
13. Studying the impact of the pandemic on growth-inflation dynamics and the outlook,
proposing policy interventions with rationale and expected outcomes, and assessing the
effectiveness of announced measures have been an integral part of the department's
work all through the pandemic. For inflation analysis, increased attention was paid to
interpreting prices data available from alternative sources when official data collection
came to a halt during the early part of the pandemic. Real time mobility indicators and
market arrivals data for agricultural commodities were also put to use. It became critical
to study the role of supply and demand side factors as well as the behaviour of price
mark-ups in view of the lockdowns. A supply chain pressure index for India was
constructed in line with the global supply chain pressure index, which is now updated
and monitored regularly for policy purposes.
14. When the inflation target reset date for another five-year period was fast
approaching (starting April 1, 2021), a lively debate surfaced outside the Reserve Bank
on the appropriateness of the 4 per cent inflation target with the +/- 2 per cent tolerance
band. The researchers of the RBI undertook a comprehensive review of the monetary
policy framework, examining all relevant issues, and recommended retention of the
same target for the next five years. We accepted this recommendation and sent
proposals to the government accordingly. The Report on Currency and Finance (RCF)
2020-21 with the theme Reviewing the Monetary Policy Framework has greatly helped
in providing clarity on monetary policy and issues related with the framework.
15. With the pandemic's impact lingering and supply chain disruptions persisting, an
objective assessment of the scars of the pandemic and identification of reforms that
could raise the country's growth trajectory became an important research issue. In the
RCF 2021-22 with Revive and Reconstruct as theme, the department examined in
detail the effectiveness and limits of crisis-time policies and the areas that needed
policy attention to rejuvenate growth. The revival of the annual RCF, which had been
published uninterruptedly since 1937, after a gap of seven years has been widely
appreciated.
16. A widely read publication of the department is the monthly "State of the Economy"
article in the RBI bulletin, which is being published since November 2020. This revived
the tradition that began with the first issue of the bulletin in January 1947 but was
interrupted in 1995. The bulletin also carries research articles on various topics of policy
relevance that help inform and guide public debate. Some of the important policy issues
on which the economists of the department joined national debate through bulletin
articles expressing their independent views include: the impact of RBI's pandemic
related policy measures; the relationship between RBI's balance sheet size and
inflation; the equilibrium real interest rate in India; drivers of movements in the yield
curve; COVID-19 impact on food price mark-ups; rural urban inflation dynamics; risk
analysis of state finances; the quality of public 9 expenditure; external debt
sustainability and vulnerability; privatisation/consolidation of public sector banks;
estimation of green GDP for India; and the silent revolution in renewable energy.
17. To further strengthen the general government statistics in India, the maiden Report
on Municipal Finances - detailing the local government finances data - was published
by the department this month. The report covers finances of 201 municipal corporations
(out of around 221), accounting for nearly 70 per cent of the finances of urban local
bodies in India. The coverage will be expanded going ahead.
18. The department has also been expanding its scope of research activities to meet
evolving challenges in areas such as climate change, digitalisation and global
spillovers. The department collaborated with domain experts outside the Bank to
compile KLEMS (i.e., capital, labour, energy, material and services) data for India and
has recently taken over the full responsibility for the same. The department would also
be hosting the 6th Asia KLEMS conference in India next year.
III. Challenges Ahead for the Research Department
19. The world we face today is aptly described by using the acronym 'Vuca', which
stands for volatility, uncertainty, complexity and ambiguity. Many of the
backwardlooking models, that run on past data, may fall short of providing useful information and
estimates for policy. The department must further strengthen its consultative approach
to collect first-hand information directly from the stakeholders. When the department
was faced with the challenge of explaining food inflation dynamics with greater certainty
just before the pandemic, it conducted a nationwide survey of farmers, retailers and
wholesalers. The department would repeat the survey next month to understand the
changes brought out by the pandemic. The department also conducts a bi-monthly
survey of retailers through its regional offices, collecting information from retailers on
expected price changes of essential food items one-month ahead, which it uses in its
nowcast of inflation. A team from the Bank is working jointly with the Indian Council for
Research on International Economic Relations (ICRIER) to develop a food inflation
projection framework, involving eminent agri-experts and market leaders in different
food items. Such initiatives must become the norm in other areas of research in the
Bank.
20. As I mentioned earlier, there is increasing use of Big Data and data generated by
private sources for policy research. We cannot escape the fact that data is the new oil.
The department may have to look at all such data, being mindful of ways to deal with
misleading and noisy analysis that such data may at times throw up.
21. For the research function in the Bank to remain effective, it would require constant
upgradation of skills of the economists in the department, recognising the new
possibilities in the information age and access to superior computing power at lower
costs these days. While the Bank has multiple schemes for training, both in India and
abroad, for an economist there are two best ways to acquire the required skills - first,
study and write more research papers regularly (or learning by doing); and second,
have a PhD that prepares you with all basic skills for conducting research. An
Economics Benchmark report by centralbanking.com in December 2021 after a survey
of 33 central banks found that on average, one in five economists in a central bank
have a PhD. I am glad to note that the Reserve Bank compares well as one in four
economists in our research department has a PhD. The Bank provides paid leave and
financial incentives for staff to acquire PhD degrees and I hope in future our ranking
would improve further. An integral part of skill upgradation would be embracing new
techniques for applied research. With growing sophistication of the algorithms, the
manifold increase in the three Vs of data - volume, velocity and variety, and the
quantum leaps in computing, human intelligence can be used better for analysis, with AI
/ML allowing automation of data processing.
22. From the standpoint of the Bank, research is increasingly becoming important to
almost every major function, as a result of which research units have been set up in
other departments. That process needs to be sustained and scaled up pro-actively.
Moreover, in a vast and diverse country like India, research on regional issues also
merit policy attention.
23. The department must internalise strategic medium to long-term research issues in
its research agenda. Separate teams may work on such issues. This would help in
identifying and maintaining a list of structural policy changes that can raise the growth
trajectory of the economy in a sustainable and inclusive manner.
24. The trifecta of deglobalisation, climate change and deeper penetration of technology
appears to be the most anticipated trend for the future. This can be potentially
disruptive, requiring strategies to mitigate the associated risks. The aftereffects of the
three shocks I mentioned earlier are still unfolding and would warrant constant vigil. The
research function of the Reserve Bank, therefore, must remain prepared to respond to
these multiple possibilities as it has done in the past.
25. I wish the conference all success and do hope that the learnings from different
sessions here would help the department in setting new goals to further strengthen the
research function of the Bank.
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Feedback collected directly from stakeholders in several key sectors of the economy
included vaccine manufacturing firms, pharmaceutical companies, transport operators,
hotels, restaurants, tour operators, shopping malls, amusement parks, airport ground
handling firms, MSMEs, mutual funds industry, small finance banks and micro finance
entities, besides trade bodies and banks. This helped in dealing with the information
gap created by the pandemic.