RBI (Reserve Bank of India) continues to fight its lone battle against inflation by raising the policy rates yet again for the 12th time in this cycle.
You must have got used to that by now and if you are looking for some indication of when RBI will pause, I am afraid there is not much good news. The only comfort seems to be that inflation in FY12 has been mostly in line with RBI’s expectation and it has not flagged any significant upside risks to the inflation forecast in this policy.
Apart from that, the focus on inflation continues. The features of inflation mentioned in the statement—“much above” comfort, generalized, sustained sequential momentum, suppressed nature of inflation for some commodities, possible effect of depreciating currency and that demand-side factors are responsible for food prices as well—clearly point towards more monetary tightening ahead.
Also, it was interesting to note that in contrast with earlier monetary policy statements, the “expected outcome” section only refers to containing inflation and inflationary expectations. In earlier statements, maintaining growth and financial stability were also mentioned in this section. There is a reluctance to change the anti-inflationary policy stance “prematurely”, given that in 2010 such a move led to the re-emergence of inflationary pressures.
The slowdown in growth due to tightened monetary policy is more or less in line with RBI’s broad hypothesis that inflation can be brought down only by moderating near-term growth. So, it seems that the tolerance of RBI for a growth slowdown is higher and reversing the monetary stance might not be an option which will be considered any time soon. Even the global uncertainties, which some thought would be an excuse for a pause in September, do not seem to preoccupy RBI too much.
This could be interpreted as a somewhat different stance from the other Asian central bankers, who have preferred to “wait and watch”.
Although, to be fair, the statement’s forward-looking section on monetary policy stance does mention that implications of global developments will be closely watched.
The more difficult question now is whether interest rate hikes are at all making any dent on inflation or inflationary expectations. There is no doubt that India is suffering from an inflation problem, which has multiple sources. Unfortunately, at this point, the only policy lever being used to counter inflationary pressures is the interest rate. So, it is not unusual that we will have to use that instrument harder to generate the desired effect.
Also, we do not know the counterfactual of what would have happened to inflation if RBI had not hiked so aggressively.
We expect RBI to hike the policy rates by 25 basis points in October as well. If anything, the tone of the policy statement keeps the door open for further rate hikes after October.
Samiran Chakraborty is head of research (India) at Standard Chartered Bank.
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