RBI’s unexpected pause doesn’t inspire confidence in the fight against inflation

Announcing the decision to keep the repo rate unchanged at 6.5%, RBI Governor Shaktikanta Das said the decision of the MPC was for “this meeting only”. It is a pause, not a pivot, he insisted. The unanimous vote to keep the rate unchanged, therefore, cannot be interpreted as the end of the rate-hike cycle at this stage, and depending on how inflation shapes up, further rate hikes are not ruled out. can be done.

Although Das insisted that the RBI’s “fight against inflation is not over” as inflation has not yet returned to the target level of 4%, the pause seems intriguing and premature. The MPC does not expect that it will succeed. Bringing inflation down to 4% anytime soon. It expects inflation to remain well above target this year.

The MPC’s rationale for the pause is that it wants to assess the impact of 250 bps cumulative rate hikes over the last 11 months. It will clearly see the impact of the US Federal Reserve’s rate hike slowdown in the wake of ongoing banking stress, volatility and concerns about financial stability in global markets.

All this was known to economists and other monetary policy experts. There was a consensus for a hike of 25 bps after the moderation seen in the consumer price inflation rate two months ago proved to be temporary. It was 6.4% in February. Core inflation was also above the maximum tolerance level prescribed for CPI inflation.

Economists and market players who were vociferously arguing for a 25 bps hike are now praising the pause, but the question that emerges is whether a 25 bps hike will help the MPC achieve its inflation target of 4%. will overtake?

The MPC has in fact raised its gross domestic product (GDP) growth forecast for 2023-24 to 6.5% from 6.4% and slashed its retail inflation forecast to 5.2% in 2023-24 from 5.3%. Though within the tolerance band, it will still be well above the target level of 4%.

This leads to another question worth asking: is the MPC really motivated by a legal mandate to rein in inflationary pressures in India, or is the central bank giving undue weight to considerations outside its legal mandate, such as Maintaining the lowest possible interest rate differential The Fed’s policy rate? This has an impact on the outflow of dollars from the country and hence the rupee-dollar exchange rate, making it a bigger political and electoral consideration than retail inflation in the current context.

Last year, the RBI had come to the monetary crunch in an off-schedule meeting. It wasn’t through a well-telegraphed, frictionless transition. No new data on the Indian economy was revealed. The RBI’s timing was determined by the Fed’s much-anticipated interest rate hike. Later, the RBI tried to cover up the reason for the eleventh-hour change by saying that it was focusing on fighting inflation.

But it is no secret that the change was triggered not by a sudden concern for growth-slowing inflation, but by New Delhi’s pressure to protect the rupee to prevent the interest rate differential with the US from narrowing. This would have accelerated the outflow of dollar investment, putting pressure on the rupee.

Central banks certainly have the option of taking unexpected decisions. This is not to suggest that they should be predictable at all times. But the fact remains that the RBI has allowed long-term inflation to stray far from the target level in the recent past. This raises doubts about its commitment to the inflation mandate.

The MPC’s decision to hold off on rate hike does not instill confidence in RBI’s commitment to fight against inflation. The fact that the RBI – like its counterparts in other countries, including advanced economies – has consistently and spectacularly failed to assess the strength and durability of inflationary pressures does not add to its credibility.