The Reserve Bank of India’s (RBI’s) monetary policy statement had all the elements that should have led to a tightening of its stance. It flagged six upside risks to already rising retail inflation and all the good things that will happen to growth.

It also showed that the most dovish member of the monetary policy committee, Ravindra Dholakia, has abandoned his call for a cut in policy rates.

But then the statement fizzled out like a badly written script.

RBI acknowledged the fiscal slippage, the rising input costs, firming of oil prices, hardening inflationary expectations, the impact of house rent allowances and finally the guaranteed minimum support farm prices by the government in the Union budget.

The central bank said that retail inflation, already at a 17-month high of 5.21% in December, won’t abate much anytime soon. It has forecast that retail inflation would be 5.1-5.2% in the first half of fiscal year 2018-19 (FY19).

It also sounded tough on the government for having given up fiscal frugality. Governor Urjit Patel said that significant deviations in fiscal prudence would make RBI’s job more challenging. All this was feared by the markets and bond yields had already hardened significantly.

But the central bank then went on to temper its own words, firstly by keeping its stance neutral and then pointing to the persistent slack in output and subdued rural wages growth. It went on to say that oil prices could move either way and not only upwards.

These mitigating factors sit uncomfortably in the statement, especially when RBI goes on to forecast a pickup in gross value added (GVA) growth to 7.1-7.2% in FY19.

Surprisingly, the central bank has forecast slowing inflation but a quickening GVA growth for the next fiscal year. RBI expects retail inflation to slow to 4.5-4.6% in the second half even as the GVA growth picks up to 7.1% from 6.6% this year.

The probability of this happening is low especially in the wake of minimum support price hikes and sticky but rising core inflation. Of course, the central bank does say that the lower headline inflation would be a product of a favourable base effect.

What this means is that these forecasts in all likelihood will be revised in future.

The policy statement shows that RBI is convinced about the hardening of inflation but is uncertain on the magnitude. Therefore, its arguments on mitigating factors don’t seem to have the strength of conviction behind them.

But, in the current market environment, who can blame it? The inconsistencies in the monetary policy statement suggest that while RBI is fully aware of the risks in its neutral stance, it is also rattled by the meltdown in equity and bond markets domestically and in global markets.

Fear begets fear and so the central bank has chosen not to rock the boat further by laying out its concerns categorically. Since part of its job is to manage expectations and sentiment, one cannot fault RBI for being mellow.

For now, it buys the market time to stabilize and will be greeted with a sigh of relief.

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