The MPC’s ‘If it ain’t broke, don’t fix it’ rate decision has its merits | Mint

The MPC’s ‘If it ain’t broke, don’t fix it’ rate decision has its merits

On the regulatory front, Governor Das announced a series of measures with a view to maintaining financial and macro-economic stability. (PTI)
On the regulatory front, Governor Das announced a series of measures with a view to maintaining financial and macro-economic stability. (PTI)

Summary

  • Credit for India's happy mix of inflation and growth should be shared by RBI's rate-setting panel and the Union government. The centre's supply-side measures have helped the central bank do its job.

The 46th and last meeting of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) before the government’s Vote-on-Account on 1 February 2024 was a no-brainer. With growth doing better than all expectations, exceeding Governor Shaktikanta Das’s prophesy of a “surprise on the upside," and inflation seemingly under control for now, the MPC’s decision last Friday to maintain the status quo was not surprising.

The repo rate at which the central bank pumps liquidity into the system was retained at 6.5%. The focus on withdrawal of accommodation was also retained. ‘If it ain’t broke, don’t fix it’ seems to be the MPC’s underlying rationale, and, prima facie, has its merits.

Sure, some might cavil at RBI’s Panglossian view of the India growth story, the conviction that we can remain an oasis of growth and resilience at a time when, by Governor Das’s own admission, “normality still eludes the global economy." But the numbers, both on the growth front (7% in 2023-24) and inflation front (5.4% for the year), look reasonable enough.

The question is whether this happy mix of accelerating growth and slowing inflation can be sustained. Even ignoring Deputy Governor Michael Patra’s comment at Friday’s post-policy press conference that even 7% growth seems conservative, it does seem that we are enjoying the best of both worlds. Remember, it was only a year ago that the MPC had lowered its growth estimate and kept its inflation estimate unchanged.

The central bank’s chest thumping is, therefore, not entirely without justification. In all fairness, though, the credit for doing what appears to be a fine balancing act must be evenly divided: between the government’s supply-side measures and RBI’s demand-compression moves, whether through interest rate action (inaction?) or prudential measures like raising risk weights on unsecured retail loans.

The reality is that the government has lent a helping hand by extending the scheme for free supply of foodgrains, keeping oil prices under check, etc. Such measures have contributed to keeping headline inflation under control. And though the impact of these measures will, doubtless, show up in a higher fiscal deficit and hence higher interest rates and inflation, the time for reckoning will come later. And, with a little bit of luck, after the Lok Sabha elections!

There are few things that governments in electoral democracies, especially those with significant poverty, fear more than fast rising prices. With general elections just a few months away, RBI and the MPC can count on continued support from the government’s supply-side measures, making their task both easier and (importantly) politically more acceptable. In the language of today’s generation, the finance minister has got RBI’s back! And that makes all the difference.

The only fly in the ointment is possible over-heating. But if the MPC was worried about over-heating and attendant asset-price inflation, of which there are unmistakable signs, given how prices have shot up across asset classes—stocks, gold, real estate—the governor gave no inkling of that. This is despite growing research evidence that asset price inflation does, eventually, spill over to headline numbers. Which, perhaps, explains why Governor Das’s comments at the press conference were distinctly more hawkish and a better fit with his description of the policy as “actively disinflationary" than the remarks in his prepared statement.

If Governor Das’s statement was unremarkable in terms of the measures that markets normally look at—rate action, hawkish commentary and so on—what was notable was that for the first time in recent months, a major part of the statement was devoted to liquidity and prudential measures. This is not surprising. Interest rates in an economy are a function of liquidity. The extant scheme of things, wherein the MPC decides rates and RBI decides liquidity, can lead to situations where the rate action is at odds with system liquidity; this is something that MPC member Jayanth Varma has pointed out repeatedly in his remarks in the minutes of MPC meetings. And is, no doubt, the reason for the 5:1 split decision on retaining the stance of “withdrawal of accommodation."

On the regulatory front, Governor Das announced a series of measures with a view to maintaining financial and macro-economic stability. The announcement of a new framework for the hedging of foreign exchange risks was long overdue, given that many corporates are still reluctant to hedge. Strong foreign portfolio flows and (unfortunately) lower net foreign direct investment inflows do not bode well for stability in forex markets and the new framework will nudge more corporates to use hedging tools.

Likewise, new regulations on ‘connected’ lending or lending to persons in a position to influence lenders’ decisions (presumably, a belated learning from the Chanda Kochhar case) and on web-aggregation of loan products have not come a moment too soon.

Enhancing limits for UPI transactions, easing restrictions on two-factor authentication for specific recurring payments via e-mandates and setting up a cloud facility for the financial sector and a fintech repository are also positive. As is the central bank’s decision to allow reversal of liquidity facilities under both the Standing Deposit Facility and Marginal Standing Facility even during weekends and holidays to facilitate better liquidity management by banks.

Overall, though, there’s no getting away from the fact that the credit for today’s happy mix of inflation and growth must be shared by the MPC and the government.

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