Does the Reserve Bank of India’s (RBI) decision to hold fire for now has something to do with the fact that national elections are just around the corner? It did not cut interest rates on Tuesday.
Economic slowdowns of the sort that India is now battling are usually met with interest rate reductions by the central bank and higher public spending by the government. The government has already stretched public finances to the limit, with the combined fiscal deficit of the Central and state governments at recent highs.
But there could be another factor at play as well. The Election Commission that is in charge of the logistics of an election also ensures that polling is free and fair. Political parties will be under a code of conduct soon to ensure that they do not tweak policy or use public funds to woo voters.
The national elections are due this summer. What if there is another jolt to the economy around then? The government will be tied down by the code of conduct. So, it’s best the central bank has some ammunition to fire.