By keeping the repo rate unchanged at the existing 6.5 percent, the MPC has at last pressed the pause button on making funds costlier. Everyone in the loop was predicting a 25 bp (basis points) increase, and thus the halt has come as a welcome and surprising relief.
The RBI governor Shaktikanta Das in his speech this morning on the outcome of the MPC deliberations in the last couple of days said while the MPC was unanimous in pressing the pause button on hiking the bellwether repo rate. He also cautioned that this was for once and the MPC could anytime review the situation between now and the scheduled next meeting, if the situation so warranted. This was of a piece with the trade policy for 2023 announced by Piyush Goyal a few days ago----no end date. The government seems to have decided to make its policies, be they monetary or trade, open-ended and not cast them in stone for any length of time.
This is as it should be given the truism that uncertainty is the defining feature of monetary policy (Allan Greenspan as quoted by Guv Das in his today’s speech).
While the RBI and MPC remain fixated on reining in inflation, the dawning realisation that growth can't be put on the back burner seems to have made them relent a wee bit and press the pause button on rate hike that has recorded a 290 BP hike since May 2022. That the Indian authorities have at last broken free of robotically following the US Fed insofar as rate hikes are concerned reflects the reality that our compulsions and constraints are not exactly on all fours with the US’.
Das did well to emphasise that it would take a ‘durable decline’ in inflation now standing at 5.2 percent to suspend its worldview that it ought to pursue a policy of non-accommodation to rein in inflation. It is not only money supply that is responsible for inflation but many geopolitical factors and domestic realities.
Organisation of the Petroleum Exporting Countries (OPEC) has again resorted to production squeeze sending the crude oil prices soaring to $85 a barrel. While rabi crop has been good, unseasonal rains have wreaked havoc with the standing crops. Indeed, food inflation is largely due to our inability to address the problem of volatility in potato, tomato and onion prices, the trio that are the staple food of majority of our households. Food processing industries and cold storage can address this problem substantially.
But these two and other supply side issues are not within the RBI remit. NRI remittances at the record level of US $107 billion in the calendar year 2022 came for a special mention in Das’ speech. Indeed it is a cause for cheer as our forex reserves now stand at $600 billion. That the remittances are by and large from the non-resident Indians (NRI) in the US and not from the gulf region has earlier has provided a fresh fodder for our policymakers----the Indian diaspora is now more white-collared. They have struck it rich in their respective spheres of excellence. Be that as it may.
RBI to its credit has not been oblivious of growth concerns despite its first priority of controlling inflation. That is the takeaway from this latest MPC endeavours. Indeed flexibility is the antidote to volatility which the MPC has done well to realise and not remain mulishly obstinate on pursuing dearer money policy as an article of faith. But then it is still work in progress as MPC has realised it cannot let down its guards but stay vigilant on a day today basis.
— The author, S Murlidharan, is a CA by qualification, and writes on economic issues, fiscal and commercial laws. The views expressed are personal.
Read his previous articles here (Edited by : C H Unnikrishnan)
First Published: Apr 6, 2023 1:55 PM IST
