It’s time for RBI to end ‘Take it Easy’ policy

Over the past several months, since May 2020, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), headed by the Governor, Tamil Nadu cadre of the Indian Administrative Service, Shaktikanta Das, seems to have taken Rahman’s advice seriously. Is. It has taken easy (monetary) policy to a whole new level!

It rests on the status quo. on both policy rates and stances. stubbornly! It is almost as if nothing changed in the intervening period, in the view of the MPC, or RBI.

But the facts show something else. Growth, after falling to an all-time low of -24.4% in Q1 20-21, returned to a record 20.1% in Q1 of 21-22 (driven by the base effect) and continued to improve in subsequent quarters. , By the end of September 2021, GDP (Gross Domestic Product) had crossed the pre-Covid level. Certainly, the fact that we have lost two years of development due to the pandemic is nothing to write home about. But the important thing to note is that India is no outsider in that regard.

However, even though the picture on the growth front shows a steady improvement, on the inflation front the picture is quite the opposite. Inflation ruled above the RBI’s tolerance band of 2-6% (average inflation during FY20-21 was 6.2%) and continued to rule higher for FY21-22. Latest figures show consumer price inflation for February 2022 at an eight-month high of 6.07, while wholesale price inflation at 13.11% for the 11th consecutive month of double-digit inflation, even as high crude oil prices Even without accounting for (fuel prices were kept unchanged from November 2021 to March 2022, courtesy state elections).

No wonder the question tops the minds of most observers as the MPC meets later this week, and the governor announces his decision on the policy (repo) rate on Friday, whether the MPC, and more importantly, It’s time to realize that RBI. Shade inertia. Easing monetary policy, no doubt, served us well in the early days of the pandemic, has run its course. Now it’s time to change gears and deal with the big bogey-inflation in the room. So, will the MPC finally signal its willingness to change? Will it change its tone, its stance or policy rate? Will it eventually make up for lost time or will it, Larry Summers, former US Treasury secretary, said of the US Fed, “continue to be so behind the curve that it cannot even see it”?

Unfortunately, the portions are not very bright. While both Governor Das and his deputy governor in charge of monetary policy, Michael Patra, have spoken of the need to revise inflation and growth projections in the light of recent developments, they have reiterated their familiarity so far that growth is still under pressure. Cooperation is needed. This, despite the fact that the events following the MPC’s February meeting intervened – the ongoing Russo-Ukraine war that saw a dramatic rise in the prices of oil and other commodities – favored inflation control with a growth-inflation trade-off. should have changed equally dramatically. ,

Remember, only revised estimates mean little. They must be supported by action. Unless the MPC’s decision and the RBI’s actions are in line with the changed circumstances and the new realities reflected in the Revised Estimates priorities, the only possibility we will see is the – take it easy policy. At a time when there is a very real threat of inflation rising and staying above the 2-6% target range, thanks to rising oil prices, the RBI needs to return to its mandated role of ensuring price stability. At least the MPC should indicate a willingness to rethink its easy-to-read (friendly) policy and take a neutral stance.

And, unlike in the past, where often, the RBI negated the MPC’s decisions through a series of open market operations, euphemistically called ‘liquidity adjustments’, which effectively exceeded the MPC-determined policy rate. Brings the rate down considerably. The decision of the MPC should be followed in letter and spirit.

By now it is quite clear that the continuation of easy monetary policy is a tug of war. Credit offtake has barely increased, while markets largely bucked the RBI’s rate signals as well as the governor’s plea to ask banks to abandon their commercial instincts and treat the yield curve as a public good. Bond yields have risen significantly in the past few months.

To be sure, the government’s announcement of big first half borrowings has skewed the pitch somewhat. After a two-year bailout from the RBI, North Block (which houses the finance ministry) may feel disheartened. But the governor could always take a leaf out of the books of economist John Maynard Keynes, and ask, ‘When facts change, I change my mind – what do you do, sir’.

‘Time to end’ for RBIeasy‘ Policy!