Monetary Policy Committee (MPC) ended its legal tenure at the Reserve Bank of India (RBI) on 6 August with a clinical decision to hold interest rates.
The latest Monetary Policy Committee meeting showed the recent rise in retail inflation vexed members. In April, May and June, the headline retail inflation has been above 6% whereas the law mandates a flexible inflation target of 2-6%. If RBI fails to keep inflation below 6% for two consecutive quarters, the Reserve Bank of India (RBI) would be forced to give an explanation to the government and take immediate remedial measures.
Because of rising inflation things have got complicated for India’s monetary policy committee and could restrict its ability to promote growth, the August meeting showed on Thursday.
When the central bank around the world is also at a crossroads. And though the challenges are very different, it will be interesting to see how the global trends influence Indian central banking and its inflation targeting regime.
The government and market expect RBI to single-handedly jump-start the economy, which has been almost comatose since demonetization in late 2016. RBI has slashed rates severely, poured inordinate liquidity into the system and indulged in extraordinary regulatory forbearance. Yet, the economy has barely responded. RBI governors have even used the term “heavy-lifting” to describe their unfair burden. Most of our growth problems should be addressed through structural reforms and confidence-boosting measures… the central bank cannot stop electricity load-shedding with interest rates.
The uncertainty on the inflation front and the need for more fiscal measures were highlighted by almost all members as it would help the economic recovery as the MPC’s hands are tied due to its inflation-targeting mandate.
This frustration was visible in deputy governor Michael Patra’s statement. “…Technical considerations under the monetary policy framework warrant a pre-occupation while dealing with the conditions of failure. All this, after a period of four years of uninterrupted success in keeping inflation well within the tolerance band… Consequently, monetary policy is forced into a standstill even when there is space available to persevere with its commitment to reinvigorate growth momentum and alleviate the effects of covid-19
So, can we expect more rate cuts in the future?
The Indian Central Bank believes that there is room for an additional rate cut but, due to rising inflation it is unlikely to implement it any time soon, minutes of the central bank’s last monetary policy committee (MPC) meeting suggested. According to the minutes released on Thursday. The central bank officials, including governor Shaktikanta Das, showed evident worry overgrowth. Das highlighted the uncertainty rendered by the stubborn infection curve of the pandemic. Both Patra and executive director Mridul Saggar noted that food inflation needs to be closely watched. In fact, Patra termed food inflation as the “real core” instead of the common point that economists make of monetary policy being positioned as the best response to core inflation, which excludes food. “The generalized inflationary pressures across food and CPI excluding food and fuel, in a situation where growth is expected to contract, is a matter of serious concern.
However, almost all members indicated that growth is still unstable and that while accurate growth projections are not possible currently, the country expects to witness a substantial reduction in 2020/21, making it tough to fully ignore the risks of improvement.
According to a recent Reuters poll, the Indian economy is likely to contract this quarter and next.