Mihir Sharma: RBI, too, waits for the next government

The Reserve Bank of India’s governor, Raghuram Rajan, has decided to hold interest rates steady. This is by and large what was expected. The reason that Rajan gave? “Looking ahead, vegetable prices have entered their seasonal trough and further softening is unlikely. Meanwhile, CPI inflation excluding food and fuel has remained flat.” Essentially, although there’s been a sharp fall in headline inflation, the RBI feels that this has been born mainly of a moderation in vegetable prices, and that those are likely to head back up soon. And the fact that consumer inflation excluding food and fuel is still around 8 per cent suggests, to the RBI, that “some demand pressures are still at play.”

 

Central bankers, we have learned, like to come up with nice-sounding words to describe their future policies. Ben Bernanke gave us the “taper”. Rajan has given us, now, the “glide”: “The Reserve Bank’s policy stance will be firmly focussed on keeping the economy on a disinflationary glide path that is intended to hit 8 per cent CPI inflation by January 2015 and 6 per cent by January 2016.” There are two things to notice about this. Firstly, the word “glide” is noticeably non-threatening; Rajan, presumably, wants to convey to the markets that he does not intend to do anything to shock them. The second is that Rajan’s timeframe, while is not as sharp as many inflation hawks would like, is nevertheless ambitious. In December-January this year, CPI inflation was around 10 per cent. He wants it to be two percentage points lower a year on; and another two percentage points a year after that. 

 

One pretty intriguing thing about the policy statement stands out: it is quite free of suggestions to New Delhi. Frequently, there are reminders that the government in Delhi must work on the supply side. After all, one of three things will have to happen before rates come down. Either the RBI has to stop focusing on controlling vegetable inflation; or people have to demand less vegetables; or vegetable supply has to become more regular and plentiful. Usually the RBI wants the last thing to happen, but thinks (wrongly) it can at least force the second to happen in the meanwhile. But, this time, the RBI merely says “Easing of domestic supply bottlenecks and implementation of stalled projects already cleared should brighten up the growth outlook.” Supply’s talked about in the context of growth, not inflation. Like the rest of India, it seems the RBI is in a holding pattern, waiting for the next government to arrive.