There were no surprises in the decision of the Monetary Policy Committee (MPC) on Thursday. The rate-setting committee of the Reserve Bank of India (RBI) maintained the status quo by voting unanimously to keep the repo rate unchanged at 6.5%, and with a 5:1 majority, voted to continue with its ‘return to accommodation’ stance . The rationale is fairly clear. Although consumer price inflation eased within the RBI’s tolerance band during March-April, it remains above its 4% target, with no chance of hitting that target in the rest of 2023-24. Meanwhile, gross domestic product (GDP) growth of 6.1% in the three months ended March 31 beat expectations and gave the MPC confidence to keep its focus on inflation, which is expected to moderate in the December quarter. Slowly it will reach its peak. And then easing in the last quarter of 2023-24. By that time, year-on-year statistical comparisons will be favorable and the impact of its 250 basis points of previous rate hikes will also have fully dissipated. This is probably when it is reasonable to expect a policy change. A major factor for inflation will be the progress of the monsoon. International prices of sugar, rice and crude oil, as well as local milk prices, will also matter. Some of these are difficult to estimate, and could reverse the MPC’s calculations, which is why it looks cautious in reducing the inflation forecast for 2023-24 marginally to 5.1% from 5.2%, even as price pressures ease. Was.
Perhaps it wants to bolster its inflation-fighting credentials, which were hit last year after failing to meet the mandated target. Critics have also blamed Governor Shaktikanta Das for confused communication. But that could not be clarified on Thursday. He said the RBI will keep an “Arjuna” eye on inflation till it comes down to its target of 4%. It expressed a steely resolve not to give up on its primary policy goal, and was not satisfied with merely bringing down inflation. below your tolerance zone. Its retention of the policy stance further signals an effort to stabilize inflation expectations, which, according to its surveys, have eased through September 2022. liquidity could undercut its efforts, with nearly half 3.6 trillion worth 2000-denomination notes have so far been returned as part of its withdrawal. 85% of these are returned as deposits 1.5 trillion for systemic liquidity. However, the RBI is pumping out excess liquidity through reverse repo auctions to ensure that there is not too much money for too few commodities.
The year 2022 was a year of global economic turmoil, marked by the ongoing Ukraine war, record levels of global inflation, and intensified monetary tightening by the US Federal Reserve. It was a year that did little good for the central bank’s reputation; It seems that they were not able to do anything right. Michael Patra, deputy governor of the RBI, in a speech last November cracked the popular joke on the bad reputation of central bankers. That difficult phase seems to have passed now, with economic parameters restarting, policy tensions and trade-offs easing, and thus making decision-making less complicated, at least in India. Our economic indicators are looking pretty healthy, and the government seems to be getting its finances under control (with a helping hand, of course, from the RBI’s massive dividend payout). With economic conditions in such a Goldilocks-like scenario, the RBI would do well to make the best of it and strengthen its institutional credibility.
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Updated: June 08, 2023, 11:31 PM IST