That the Monetary Policy Committee (MPC) would not change interest rates in its June meeting was widely known. Most economic analysts do not expect the Reserve Bank of India (RBI) to cut rates until the end of the calendar year. So, the decision to continue with a withdrawal of accommodation stance — one MPC member dissented with the decision — is not surprising. But there is a larger takeaway from the MPC meeting other than these key decisions. The most
That the Monetary Policy Committee (MPC) would not change interest rates in its June meeting was widely known. Most economic analysts do not expect the Reserve Bank of India (RBI) to cut rates until the end of the calendar year. So, the decision to continue with a withdrawal of accommodation stance — one MPC member dissented with the decision — is not surprising. But there is a larger takeaway from the MPC meeting other than these key decisions. The most important message from the meeting is that RBI is willing to do all it will take to bring headline inflation below the 4% mark and not just keep it under the upper limit of the 2%-6% target band. This is clearly aimed at boosting RBI’s and by extension, monetary policy’s credentials as primarily an inflation targeting agency. It is also an acknowledgement that there are factors which could result in a sub-par monsoon, thereby reviving food inflation.
The only other question which needs to be answered is whether RBI is showing some degree of complacency on the growth front? One could make an argument on these lines. The headline growth forecast for 2023-24 has been kept unchanged at 6.5% notwithstanding some changes in quarterly growth projections. Both the MPC resolution and the Governor’s statement do not flag any major headwinds for growth from within the domestic economy. Some private and institutional forecasters have projected lower growth rates than this number. Tepid growth in private consumption despite a higher-than-expected GDP growth in the March quarter does not find a mention in either of these statements, even though there is a discussion about lagged effects of interest rate hikes on inflation (which will necessarily involve a squeeze on demand).
To be sure, it is possible to make a counterargument as well. India’s medium-term potential growth rate, according to the International Monetary Fund, is 6%. The economy is already growing above this number. While a higher growth rate is always desirable for India, it is eminently likely that MPC believes that it should pivot towards growth only when the economy starts underperforming vis-à-vis the potential growth rate number. It is useful to end this discussion with a recap of the Indian economy before the pandemic when growth rates did not really revive despite a 1.35 percentage point reduction in the policy rate between February 2019 and October 2019. This means the task of providing a short-term growth boost to the economy has moved to the fiscal policy arm. A cut in fuel prices could be a good idea.
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