Stay the course – The HinduBusinessLine

https://www.thehindubusinessline.com/opinion/editorial/stay-the-course/article71045538.ece

MPC should retain status quo in difficult times

The Reserve Bank of India has a sophisticated toolkit, quite apart from interest rates, to intervene in both domestic liquidity and forex markets | Photo Credit: Supatman

There has been an animated debate on whether the Monetary Policy Committee (MPC) should hike the policy repo rate later this week. Those who feel rates should be hiked have cited incipient inflation and the depreciating rupee as reasons. Here, it is important to cite a monetary policy maxim — that using interest rates to target both domestic and external parameters is generally considered to be a bad idea.

The Reserve Bank of India has a sophisticated toolkit, quite apart from interest rates, to intervene in both domestic liquidity and forex markets — which ensures that neither is roiled in the process. The use of interest rate to manage the rupee can send contrary confidence signals. Therefore, interest rate moves should be pegged more to domestic conditions. All things considered, a status quo this time seems the best course of action. These are exceptional, war-torn times. Like the rest of the world, India is faced with a difficult year ahead. Global commodity, currency and financial markets are very volatile, as a result of which India’s growth inflation-mix has altered rapidly since the April monetary policy. Growth prospects are likely to have receded by about 30 basis points for FY27 since April, from 6.9 per cent to 6.6 per cent, on supply bottlenecks.

Inflation is likely to be closer to 5 per cent in FY27, up 40 basis points — with crude prices assumed to be at an average $95 a barrel. RBI, an inflation-targeting central bank, is up against a dual growth and inflation challenge. With wholesale price inflation at a 42-month high of 8.3 per cent in April, RBI Governor Sanjay Malhotra has said that inflation could get generalised — despite retail inflation being at 3.5 per cent in April, which is within the 2-6 per cent target. In that event, RBI Governor has indicated future hikes. For now, there is breathing space, precisely because the mandate is one of ‘flexible’ inflation targeting, which allows growth concerns a look-in. There is a window to allow growth, given the prospect of a weak monsoon.