- The data they get is all contradictory or blurred. One set of factors argues for a cut while another may argue for a hike in rates.
- The data itself is often subject to revisions and corrections — whether it is IIP or GDP numbers.
- Besides, they are weighed down by this huge millstone called ‘credibility’.
- That means they have to be consistent.
- They can’t cut rates now and reverse direction next month — even if the data or circumstances change — or they would be held accountable for lack of foresight.
- So whether it is low inflation levels or the monsoon, they will have to wait for a couple of months to see that the positive effects endure.
- Of course, they have to consider a cocktail of global factors. Oil prices are always volatile, and given the heavy dependence of the economy on oil imports, one has to be cautious and wait for a few months before responding.
- Also, what the US Fed does at its meetings every second month has a direct bearing on what the RBI can do given its implications for capital flows.
- Why not just meet twice a year — once after the budget announcement, and once after significant monsoon progress, say in early August? The data will be in, you’ll know what the Fed has done, whether the rains were satisfactory, whether inflation is really low, whether the government is fiscally responsible — and you can take a careful decision that no one can fault you with. Hindsight is after all, 20:20.