Clipped from: https://www.thehindubusinessline.com/opinion/mpcs-pause-raises-many-questions/article66744884.ece
A pause accompanied by a hawkish stance is of no comfort to borrowers. It merely helps speculators
Of late, MPC meetings have been creating much excitement — not only in the economic and financial circles but also amongst the common public. The MPC’s decision in its recently held meeting on April 3-6 baffled many experts.
The RBI is mandated under the statute to keep the CPI inflation between 2 and 6 per cent. Instead of a single target, it is a wide range. The RBI is expected to keep inflation at 4 per cent; the 2 per cent leeway either way is for temporary deviations to factor in the growth and/or financial stability considerations.
For the record, between November 2019 and March 2023, over a period of 39 months, the headline inflation has been over 4 per cent; it has been over 6 per cent during 23 months. As per RBI’s own projections, the average CPI inflation during 2023-24 is expected to be 5.2 per cent. Thus, getting to 4 per cent target is nowhere on the horizon.
When the RBI started the interest rate raising cycle in May 2022, there was almost a unanimous view amongst the economists that the RBI was behind the curve and had much catching up to do. Thereafter, at the post MPC meeting press conferences, the RBI Governor has constantly reiterated the central bank’s resolve to contain inflation.
Now fast forward to the recent MPC meeting. This meeting was held in the backdrop of a global debate as to whether the central banks need to slow down their pace of interest rate hikes because of growth and financial stability concerns. The SVB episode, followed by the trouble in Credit Suisse Bank in March jolted the central banks in the West.
But despite this debate containing inflation continued to be the priority for central banks as there was no let up in their interest rate hikes.
As for the domestic scenario, the RBI stated on several occasions that the banks failing in the West wouldn’t impact financial stability here and swore by the robustness of the Indian banks. The RBI has been quite upbeat on the growth front too, hiking its GDP growth projection for 2023-24 to 6.5 per cent in its recent MPC meeting.
As for the CPI inflation, the latest figure available to the MPC at the time of their meeting was of February 2023 — 6.44 per cent. The fact that March figure, which came out post MPC meeting, is 5.66 per cent isn’t much of a comfort considering that during FY23, inflation was over 6 per cent during nine months. Further, the recent OPEC+ decision to cut their crude oil production from May, was known to the MPC before they took the decision.
It was in this backdrop, that the MPC decided to pause the interest rate increase. In the press briefing, the RBI Governor said the war against inflation continues and it was a pause and not a pivot. He also laid emphasis on RBI readiness to act, should the situation so warrant.
One wonders what situation is the RBI waiting for to act. Further, what purpose is served by a pause accompanied with such a hawkish stance? Does it really give any comfort to the borrowers? However, what is certain is that the speculators would have a field day. Meanwhile the poor would continue to suffer from inflation.
During the press conference, the RBI Governor also made a surprising observation that the monetary policy decisions were never really coupled with the US Fed action. With significant cross-border capital flows and the various investment options available across the globe, investors are bound to constantly compare the real returns in different jurisdictions. Further, with most of the international trade being dollar denominated, is it realistic for any central bank to remain indifferent to the Fed actions?
The variance between RBI’s growth and inflation projections and the actual numbers over the last few years is worrisome.
While Covid-19 and other uncertainties could be cited as the reasons for this, the need for improving the robustness of estimating methodology can’t be denied. Note that just a few days after the MPC meeting, the IMF lowered the India’s GDP growth projection for the current financial year to 5.9 per cent.
Then comes the most problematic argument — the MPC decisions are likely to have an effect on the economy with a lag of three to four quarters, and that one should wait to see the impact of the increase in repo rates during the last financial year.
As per a recent study, while policy rates were increased by 250 basis points between May 2022 and February 2023, banks had transmitted only 93 basis points to older customers and 173 basis points to the new ones. Surely, the speed of transmission of policy rate to the economy needs to improve. Not only should the banks be pushed to do so, the bond market too should be developed and deepened.
However the moot question is — in the present times of global uncertainty and ever emerging geopolitical situation, can one afford to wait for three/four quarters to decide further course of action? This sounds more like a ‘trial and error’ approach.
Section 45ZN of the RBI Act, 1934 mandates the RBI to submit a report to the Centre in case it fails to contain the average inflation below 6 per cent during the previous three quarters. The report should contain the reasons for failure to achieve the inflation target; remedial actions proposed to be taken by the Bank; and an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions.
The RBI did submit such a report to the government in November 2022. What does that report say and what action has been taken by the government on that report? At least the highlights of the report must be disclosed for the sake of public interest.
The writer is a former IAS officer and former Chairman, SEBI