The first bi-monthly monetary policy for 2018-19 was a largely desultory exercise
As expected, the Monetary Policy Committee (MPC) has chosen to keep repo rates unchanged, citing a range of risks – internal and external – that could destabilise the economy. However, its arguments for not reducing interest rates are decidedly ambivalent. On the domestic side, the RBI Governor has observed that the Centre’s intent to hike farm support prices could lead to higher borrowings. Besides, the MPC appears apprehensive of “any further slippage from the Union Budget estimates of 2018-19”, perhaps on account of election-related spending. Fears of a patchy monsoon have added to its apprehensions.
Yet, the MPC has also lowered its inflation projection for the first half of 2018-19 vis-a-vis its February statement, saying that “food inflation should remain under check on the assumption of a normal monsoon and effective supply management by the Government.” Hence, the inflation projection for H1 now stands at 4.4-4.7 per cent, against 5.1-5.6 per cent two months ago. As with food prices, the MPC’s views on house rent allowance for public servants are less than clear. It cites HRA as a factor that could push inflation in 2018-19, and yet argues, while lowering its inflation projections for 2018-19, that the consumer price index overstates HRA inflation. The MPC could have presented its case for holding rates more persuasively. Besides stiffening global prices, the rate cycle is turning the world over. With rising overseas debt flows, this could destabilise the balance of payments, particularly with the current account deficit now at 2 per cent of GDP. An already volatile bond market could do with a bit of stability.
Here, the MPC should play down “fiscal slippage” concerns – more so when actual inflation has consistently fallen short of its projections. This raises the question of whether the MPC, in the tradition of many conservative central bankers, is exaggerating inflation fears, when it should actually be focusing on clearing roadblocks to investment and growth. Having chosen to adopt inflation targeting, the MPC should explain why it persists with a tight policy when inflation is well within its target range.
The deepening of the corporate bond market, which acts on cues other than inflation, has been a welcome development. The bond market, however, moves independently of the MPC. With banks too dipping into this pool, their loan rates have broken out of the MPC’s ambit. The MPC needs to take stock of these issues. With the NPA-hit banking sector unable to push credit, about two-fifth of non-food credit has emanated from non-banking sources. Yet, bond markets cannot service small industry the way bank credit can.
Above all, the effectiveness of monetary policy has been questioned the world over, with experts in the Bank of International Settlements voicing their concerns. Wages, employment and inflation do not seem to move in tandem, as economists expect. For both the MPC and central bankers worldwide, these are interesting times.