Opinion
RBI has done well not to waver on inflation
Summary
Its monetary policy committee’s status quo on the policy rate, even as it maintained an ‘Arjuna’-like eye on price rises, points to a resolve to rebuild its inflation-fighting credentials
There were no surprises in the monetary policy committee (MPC)’s decision on Thursday. The rate-setting committee of the Reserve Bank of India (RBI) maintained a status quo by voting unanimously to keep the repo rate unchanged at 6.5%, and voted by a 5:1 majority to continue with its ‘withdrawal of accommodation’ stance. The rationale is fairly clear. Although consumer price inflation eased during March-April to within RBI’s tolerance band, it remains above its 4% aim, with no prospect of that target being hit in the rest of 2023-24. Meanwhile, growth in gross domestic product (GDP) at 6.1% in the three months ended 31 March beat expectations and gave the MPC the confidence to keep its focus on inflation, which it expects will rise gradually to hit a peak in the December quarter, and then ease in the last quarter of 2023-24. By that time, year-over-year statistical comparisons would turn favourable and the effects of its 250 basis points of past rate increases also would have got fully transmitted. That is probably when a policy pivot might now be fair to expect. A key factor for inflation will be the progress of the monsoon. The international prices of sugar, rice and crude oil, as also local milk prices will matter too. Some of these are hard to predict, and could upset the MPC’s calculations, which may be why it seemed cautious in lowering its 2023-24 inflation projection only marginally to 5.1% from 5.2%, despite price pressures having eased.
Perhaps it wants to strengthen its inflation-fighting credentials, which took a beating after its failure to achieve the mandated aim last year. Critics have on occasion also faulted governor Shaktikanta Das for confused communication. But he couldn’t have been clearer on Thursday. He said that RBI would keep an “Arjuna"-like eye on inflation till it comes down to its 4% aim. That conveyed a steely resolve not to waver on its primary policy target, and that it wasn’t satisfied by simply bringing inflation down to its tolerance zone. Its retention of the policy stance further signals an effort to keep inflationary expectations anchored as well, which, according to its surveys, have moderated since September 2022. Liquidity could dilute its efforts, with about half of the ₹3.6 trillion worth of ₹2000-denominated notes having been returned so far as part of its withdrawal. Of these, 85% have been returned as deposits, adding about ₹1.5 trillion to systemic liquidity. RBI, however, has been draining that additional liquidity out through reverse repo auctions to ensure there isn’t too much money chasing too few goods.
The year 2022 was one of global economic tumult, marked by the ongoing Ukraine war, record levels of global inflation and sharp monetary tightening by the US Federal Reserve. It was a year that did little good to central bank reputations; they couldn’t seem to do anything right. RBI deputy governor Michael Patra in a speech last November recounted popular jokes on central bankers’ deflated reputations. That difficult phase now seems to have passed, with economic parameters appearing to realign, policy tensions and trade-offs easing, and thus rendering decision-making less complicated, in India at least. Our economic indicators are looking fairly healthy, and the government too seems to have its finances in check (with help, of course, from RBI’s big dividend payout). With economic conditions in such a Goldilocks-like scenario, RBI would do well to make the best of it and strengthen its institutional credibility.
