Home > Opinion > Columns > RBI on Covid-19: From inflation over growth to inflation and growth

NEW DELHI : If there is one entity that has earned the respect of a very cynical and hard-to-please group of people – stock and bond dealers, people in the financial sector and economists – it is the Reserve Bank of India (RBI) under the governorship of Shantikata Das. The confident body language, the measured speech and the emphatic statements about doing what it takes to beat the economy back into shape are in stark contrast to a fumbling finance minister – Nirmala Sitharaman – whose body language largely based on unfamiliarity with financial market terms and concepts, does not instill the same sense of comfort and confidence that Das does.

On 22 May, Das, at his favourite time of 10 am, announced another set of measures to deal with the covid crisis. An earlier than scheduled Monetary Policy Committee (MPC) meeting was held to cut repo (the rate at which banks borrow from the RBI) and reverse repo (the rate at which banks lend to the RBI) rates by 40 basis points. This means that banks can both borrow from and lend to the RBI at lower rates of 4% and 3.35%.

There is a slew of other announcements that you can read here: https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=4984

But the big takeaway is the shift in the RBI gaze from inflation to growth. No, RBI did not say this explicitly, but with central banks you have to read the smoke signals. Central banks are known to understate things, to be subtle rather than direct and to hint at things to come rather than give definite statements. It would not be incorrect to say that central bankers will call a spade an instrument for mild to medium intervention in the quest to uncover the secrets of the earth. They take subtlety to other world levels, for example, when the US Fed is ready to buy from the primary dealers, “a strange fluttering tone" of musical notes F, followed by E and then D, waft through the terminals (as documented by Neil Irwin in his book The Alchemists: Inside the Secret World of Central Bankers) to indicate that the central bank is in the market! The dealers then have 45 minutes to place their bids.

When we understand that understatement and subtlety is taken to an art form by central banks, and then we decode what happened on 22 May 2020, the shift in RBI’s stance is clear. RBI has been possibly the first official acceptance that growth rates will slip to negative in this financial year. Das stopped short of giving an estimate of the degrowth of the Indian economy, but said that GDP growth will be negative. Indian GDP will shrink in 2020-21. This means everything will shrink – from incomes, to consumption to output.

With this as the headline worry, the RBI set into motion a big change in stance from a hard inflation targeting to a directional approach and a sharp focus on getting growth back. The inflation targeting central bank is now a requirement by law that mandates that RBI must keep inflation between 2% and 6%, with a target to move towards 4%. An independent Monetary Policy Committee’s job has been to deliver this goal.

But as it happens often, give somebody a hard target and they tend to forget the sub text. The MPC got down to preserving their places on the committee and the 4% inflation target with missionary zeal and let go of many opportunities in the past to lower the policy rates to ease liquidity and stimulate growth in the pre-covid times. They seemed to forget that there was a 200 basis point headroom to inflation ahead of the 4% hard target. The governor’s statements today can be construed to mean that getting growth back on track is now the primary target using monetary policy in conjugation with fiscal policy (what the Ministry of Finance announces), while keeping inflation directionally in the given range of 2% to 6%.

But the RBI will do what it takes to manage the crisis. The crisis right now is growth and not inflation. This is a big shift. The stock market’s immediate sulk was based on the negative growth official confirmation. But once it works through the subtext of Das’s statements, it will go rethink its thoughts.

There are dark days ahead for both the world and India in terms of growth, jobs, incomes and livelihoods. A central bank that is proactive and articulates that it will use methods conventional and unconventional is deeply comforting. It would have been a great jugalbandi if the MoF was equally confidence insipiring.

(Monika Halan is Consulting Editor at Mint and writes on household finance, policy and regulation.)

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