The decision by the RBI’s Monetary Policy Committee (MPC) to keep the central bank’s benchmark “repo” or overnight lending rate unchanged, along with maintaining a “neutral” stance in its latest bimonthly review, can be questioned on many counts. The resolution statement released at the end of its two-day meeting admits to “deceleration” of economic activity since July-September and “contraction” in gross fixed investment in the latest January-March quarter. More importantly, it refers to lower inflation expectations “three months ahead and a year ahead”, based on the RBI’s own survey of households. On both grounds — a deepening slowdown with no signs of an investment pickup and “the abrupt and significant retreat of inflation” since April — there was a clear case for a reduction of policy rates, undertaken last on October 4. Even if no actual lowering of rates was resorted to, the least the MPC could have done is signal a return to an “accommodative” stance, as was the case prior to February. The current repo rate of 6.25 per cent, when adjusted for a consumer price index (CPI) inflation of 3 per cent, works out to over 3 per cent in real terms. This is much more than the RBI’s own 1.6-1.8 per cent estimate for the “neutral” or “natural” interest rate for India, consistent with the economy growing at its potential with low stable inflation.
But whether right or wrong, one must still give credit to the MPC for its unwavering commitment to reining in inflation and not taking any premature action now that might risk “disruptive policy reversals later and the loss of credibility”. The latter part is most important. The RBI today enjoys credibility globally as a regulator largely for the impeccable inflation-fighting credentials it has built in recent years. That credibility has only been reinforced by the Narendra Modi government’s decision to enter into a monetary policy framework agreement with the RBI, tasking the latter with targeting CPI inflation to 4 per cent or thereabouts in the medium term. Subsequently, a six-member MPC headed by the RBI governor was constituted to take decisions on interest rates. The whole idea here was to insulate such decision-making from any political or populist pressures.
Under these circumstances, it is unfortunate to see attempts, particularly by the Finance Ministry, to seemingly influence the MPC’s decisions. Finance Minister Arun Jaitley and Chief Economic Advisor Arvind Subramanian issued statements, both making explicit arguments for a significant monetary easing. It goes to the MPC’s credit for fending off these pressures, even if one might not agree with its decision. Ultimately, there are institutional arrangements that need to be respected. We would leave it to the MPC to decide when the time is ripe for the next cut, which may actually come sooner than later.