From the RBI, a Policy Statement for Our Times
The monetary policy committee (MPC) of the Reserve Bank of India has opted for a back-to-back increase in the benchmark repo rate for the second time in as many months.The repo rate is the rate at which banks borrow from the RBI, and the new rate of 6.5% conveys many messages.
Clearly, the central bank is guided by a combination of global and domestic factors which threaten macroeconomic balance. Most of those risks have existed for a while. Through this strong policy statement, the RBI is reiterating its commitment to combat them through its interest rate policy. If in the process, the policy becomes entirely predictable, it is hardly the bank's fault. In fact, predictability can be a great virtue during these times of global turbulence.
An overwhelming number of forecasters, analysts, policy makers and others have endorsed this stance, which has been dubbed as neutral.
The factors behind the decision need hardly be mentioned.
Higher oil prices, a rising rupee and core inflation, and revision in Minimum Support Prices have been the main factors behind the rate hike. At the same time, the RBI has stuck to its “neutral” stance, indicating a shallow rate hiking circle.
The inflation forecast was broadly unchanged with risks evenly balanced. The GDP growth forecast for FY 2019 was unchanged at 7.4%.
The positive features of the policy statement may be summarised as under:
First, that it is on expected lines. The virtues of remaining predictable have been discussed above.
Second, that the RBI is seen hedging its risks in a volatile global environment, high oil prices and continuously rising interest rates in the US.
Third, the case for a back-to-back repo rate hike has been strengthened by sticky domestic inflation and fiscal profligacy.
On the whole, this neutral policy stance is justified in the context of the global backdrop of volatility. Nobody can be sure of the evolving circumstances. Changing the bank's stance would mean getting wedded to a string of rate hikes.
If anything, the actions of the central banks of other emerging markets in defending their currencies lends support to recent RBI actions. The only significant point of criticism is that a rate hike can push up the domestic cost of already high consumer loans. Home loan rate, for example, have been pushed up by lenders. But these are small points. The balance of knowledgeable opinion is supportive of what the RBI is doing.
This article went live on August third, two thousand eighteen, at four minutes past eleven at night.The Wire is now on WhatsApp. Follow our channel for sharp analysis and opinions on the latest developments.
