By Rupa Rege Nitsure
A transparent monetary policy has a clearly defined goal like price stability. In the case of India, the RBI came out with a new monetary policy framework in January 2014, anchoring for an inflation (CPI-based) target of 4.0 per cent with a band of plus/ minus 2.0 per cent. It has also proposed to bring the targeted CPI (consumer price index) inflation down to 8.0 per cent by January 2015 and 6.0 per cent by January 2016, before bringing it down to 4.0 per cent in three years. The adoption of such a rule-based framework has made the monetary policy exercise highly transparent for India. In fact, in every bi-monthly policy statement, the RBI tries to show the degree of consistency between the actual inflation trajectory and its anticipated path.
The credibility of policy is attained when the central bank’s actions are consistent with reaching its monetary policy goal. The easing of retail inflation for two consecutive months, the recent fall in global crude prices, the benign outlook on global non-oil commodity prices and the government’s firm commitment to fiscal consolidation had given rise to the wide-ranging expectation of an easing cycle. Some had wrongly interpreted the RBI’s stance in the June policy as “dovish” because it had said that further policy tightening will not be warranted, if the economy stays on a disinflationary course witnessed during May-June, 2014. However, that was a conditional statement and in June as well as in August, the RBI has clearly warned of several upside risks to inflation on account of adjustments in administered prices, deficient monsoon and its impact on food production, possibly higher oil prices stemming from geopolitical concerns and exchange rate movement, and growth in the aggregate demand. In the latest policy review, the central bank appears to be more concerned about achieving the 6.0 per cent inflation target by January 2016 than achieving the 8.0 per cent target by January 2015. And, therefore, it has suggested a heightened state of policy preparedness to contain inflationary risks. According to the RBI, a lot depends on the government’s actions on food management and timely completion of projects that would set the pace for the supply-side response.
Given these uncertainties, the RBI remains worried about the medium-term sustainability of the disinflation process and, hence, it has chosen to keep the policy rates as well as the CRR (cash reserve ratio) unchanged on August 5, 2014.
While “pessimistic” on the inflation front, the RBI appears to be quite confident about the evolving growth trajectory. This confidence stems from the improved performance of exporting industries, ongoing revival of investments, unlocking of stalled projects, government’s commitment to fiscal consolidation and its favourable impact on the continued…