RBI has withheld more cards than the number of cards on the table

Another slightly disturbing element that jumped between the lines is the persistent tussle between a Monetary Policy Committee (MPC) member and RBI governor Shaktikanta Das.

First, let us analyze the decisions of the MPC: the benchmark repo rate increased by 50 bps to 5.9%, and, the determination to “stay focused on return of housing”. The rate hike was a prior decision, with the Street also concluding a 50 bps increase with the consensus. Therefore, it was not surprising that the benchmark stock exchange indices, which opened in the red at the start of trading, moved sharply into positive territory soon after the monetary policy announcement. A sharp rate hike—in favor of the currency value of the rupee as an interest rate defense mechanism—certainly would have stirred the markets.

So far, so clear. However, it is not clear what the RBI’s policy stance on liquidity – another important variable – that feeds into short-term rates and directly affects bank lending rates. While the central bank’s position on liquidity has confused observers and economic analysts over the past few weeks, it has decided to address this with a vague “keep focus on the return of housing”.

So far, it seems the central bank prefers to sit on the fence, apprehensive for a decisive policy on liquidity, lest it upset the economy’s growth engine. The RBI’s hesitation is evident in its decision to merge 28-day and 14-day variable rate reverse repos into 14-day variable rate reverse repos, reflecting longer-term commitments in the face of fast-paced growth.

RBI’s reluctance to address the clear liquidity outlook becomes even more relevant in the face of continued defense of the currency value of the rupee, when weighed against net foreign exchange outflows during Q2FY23. The bullish trend of the dollar, coupled with flexibility in aggregate demand, is likely to continue the downward pressure on the rupee. Consequently, RBI’s future interventions in the foreign exchange market are bound to affect system liquidity. This uncertainty over the extent of the intervention could perhaps explain the RBI dragging its feet in clarifying the liquidity position.

Some sections of the market had also expected the RBI to announce a deficit liquidity policy, although this seemed unlikely in the present circumstances as the central bank was dutifully performing its role of promoting growth. The RBI’s scaling up of FY13 GDP growth estimates – from 7.2% in early August to 7% now – reflects a degree of uncertainty in its otherwise bullish economic commentary.

This uncertainty – and perhaps a degree of uncertainty that an uncertain future will bring on the economy – is also forcing Governor Shaktikanta Das to indirectly address dissent from one of the MPC members, Jayant Verma. As in August, Verma had voted against the proposal to “stay focused on the return of housing”.

Verma’s objections will become clear once the minutes are available a fortnight; But he had objected to the same motion in August and his explanation may still be relevant as the wording of the resolution has not changed. He then argued that the resolution wording indicated a terminal repo rate of 6.5%, which, given the economic inflows, may also necessitate a lower terminal rate in future. He was not opposed to taking back the accommodation, but stuck to the wording of the proposal.

This may have forced the RBI governor to respond somewhat unnaturally in his stand-alone statement: “Questions are often asked about peak and terminal rates in rate tightening cycles. Without going further, which could be dangerous in the current context, I would like to say that our actions will be carefully calibrated to the evolving scenario without being constrained by traditional or any textbook approaches to incoming data and policy making.”

In fact, his statement only adds to the helplessness and uncertainty that has gripped monetary policy making. Central bankers around the world are increasingly publicly venting their frustrations, offering guidelines on how to proceed. This has forced Das to launch side-swipes against his peers in the central banks of advanced economies. But again, Das would like to count his blessings: He certainly doesn’t want to be in the place of Bank of England governor Andrew Bailey.