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The Reserve Bank of India (RBI) eased off a bit in its “withdrawal of accommodation" on Wednesday, after its Monetary Policy Committee voted to raise its repo rate by 35 basis points to 6.25%. Having hiked this policy rate—the one at which it repurchases bonds from banks and thus effectively lends them money—by half-a-percentage-point each in its past three policy reviews, to tighten credit and fight inflation, RBI’s smaller hike was taken by market participants as a signal that it was nearing its peak rate in the current cycle. Other linked rates also stood adjusted by the same magnitude. If the bulk of the rate-raising is done, banks can hope they will soon get a fairly stable dashboard to go by. This is part of a balancing act our central bank must perform. Governor Shaktikanta Das said that RBI would keep an “Arjuna’s eye" on inflation, a reference to its target, while making its concern for our still-fragile economic recovery clear. Indeed, growth remains uneven, with the economy over-reliant on consumption and government spending, even as exports slump and private investment flatters to deceive. True, double-digit credit growth has brightened hopes of a capex revival, but external factors have also brought back clouds of uncertainty. Even so, RBI’s 6.8% GDP growth forecast for 2022-23 appears satisfactory, especially in global comparison. What does not, though, is RBI’s confidence in its bow stretch to hit its central inflation target of 4% amid uneven liquidity ripples.

While the choppy waves of pandemic times have settled to quite an extent, liquidity conditions have not fully calmed yet. Although three straight quarters of retail inflation above RBI’s upper limit of 6% (as we’ve experienced) can plausibly be pinned on covid complications, whether it can be brought within that cap in the first half of 2023-24 (as RBI projects), and then further down to 4% remains a question with only blurry answers at best. Domestic supply lines seem broadly fixed, which should ease price pressures, but demand is back too—even if only unevenly. As before, supplies per se of food and fuel may matter less than distortive factors, especially those that feed into other sectors. A weak rupee internationally has its own effect on import prices, our oil expenses are hard to predict, and it’s unclear if external turmoil is behind us just yet. Overall, while we have escaped a US-style flare-up, price levels in India remain unstable for macro reasons. Note that even core inflation (shorn of fuel and food), has ruled too high for comfort, lately.

Today, even as policymakers profess a well-calibrated pullback from big economic booster injections by way of covid relief, India must stay wary of inflationary impulses caused by policy reversals going too slowly for our economic recovery. “While being watchful of the impact of our earlier monetary policy actions," Das said, “we will keep Arjuna’s eye on the evolving inflation dynamics and be ready to act as may be necessary." If this implies an eye for precision, then its accommodation withdrawal will need to carry on till an inflation target of 4% begins to come within sight. For RBI’s bow to be strung tightly enough for this goal, another form of tightening would be needed: fiscal. The Union budget for 2023-24 must find a way to retain pandemic props that are still deemed necessary, while also sharply reducing its deficit, so as to minimize the impact of heavy state spending on prices in an economy mostly free of covid and ready for business as usual. Over to New Delhi.

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