If it soars like a hawk, sees minute details from a distance like a hawk and swoops for the kill like a hawk, then it is not a dove.
To pick up the word neutral from the monetary policy statement and conclude that the stance of policy has turned dovish would be a mistake. Neutral in RBI-speak does not mean it has loosened its grip in anticipation of smooth going; it is the equivalent of ‘composed’ in relation to Bruce Lee; it means he is ready to strike in whichever direction, as needed.
Already, the Monetary Policy Committee (MPC) expects inflation to move up from its earlier estimates. MPC would be fast with higher rates, should the Centre and the states slip up on fiscal deficit targets, as well they might, given pre-election pressures to shower largesse on farmers — a loan waiver here, a sugar package there, and sharply higher minimum support prices everywhere. A higher fiscal deficit is likely to be more inflationary than in the recent past, because investment is finally taking off, even capacity utilisation is going sharply up.
The external sector presents its own set of risks to inflation in India. As advanced economies prepare to ease off (in the EU) or reverse (in the US) quantitative easing, their interest rates harden, causing funds to be redeployed from emerging markets such as India, depreciating their currencies and hurting capital markets.
The rupee has already weakened, thanks to this effect. The process could continue further. Trade and geopolitical tensions still simmer, adding volatility to everything, oil prices, in particular. Apart from government finances, there are other internal factors that could send prices rising.
The temporal and spatial distribution of the monsoon has also turned fickle of late. Rain at the wrong time could be as damaging for crops as no rain, especially as fresh projects to harness India’s massive monsoon run-off have been scarce.
The MPC did well to raise the policy rate. It trails the banks, which have already passed on their higher cost of funds. Banks now need elbow room to operate, free from CBI raids and paralysing witch-hunts.