For the Reserve Bank of India there is just one economic indicator that dominates its policymaking calculus: price stability. With inflation-targeting as its main mandate — the consensus position that was articulated when the RBI Act was amended in May 2016 was that “price stability is a necessary precondition to sustainable growth” — the Monetary Policy Committee (MPC) has opted yet again to keep interest rates unchanged. It is not hard to follow the rationale. Price gains as measured by the Consumer Price Index had accelerated to a seven-month high in October and the RBI’s survey of household expectations for inflation over both the three-month and one-year horizons showed a “firming up”. The RBI’s bimonthly policy statement also spelt out the data points and trends that informed its decision-making. For one, the moderation in core inflation in the first fiscal quarter has largely reversed. Price gains excluding the volatile food and fuel categories are particularly at risk from “the staggered impact of HRA increases by various State governments” that could push up housing inflation in 2018 and generate second-order ripples. Given India’s reliance on imports for a bulk of its fuel needs, the latest OPEC decision to maintain output cuts to keep global crude oil prices from softening can hardly provide much comfort.
Taking into account all factors, including some that may lend respite, such as the wide-ranging cuts to the goods and services tax rate, the RBI raised its estimate for inflation over the third and fourth fiscal quarters by 10 basis points from its October projection: headline CPI inflation is now expected to accelerate and range between 4.3% and 4.7% in the second half. The MPC is, however, more confident about the prospects for growth, concerns over higher oil prices and shortfalls in kharif crop output and rabi season sowing notwithstanding. The Centre’s move to recapitalise public sector banks has won a vote of confidence from monetary policymakers for its potential to revive credit flows. Buttressing the confidence in the economy are the findings in the RBI’s survey, which posit an improvement in demand in the services and infrastructure sectors and an uptick in the overall business environment in the January-March quarter. Ultimately, though, the central bank has once again proffered a word of circumspection to fiscal authorities: taken together, the farm loan waivers implemented by some States, the partial reduction of excise duty and VAT on petroleum products and the GST rate cuts could result in fiscal slippage with accompanying consequences for price stability. For the RBI, caution continues to remain its credo.