Assume for a moment that the Reserve Bank of India (RBI) did not have to come forward with any press release on monetary policy this coming Thursday. After all, there was a time when the central bank took a view on monetary policy only twice a year and it was not long ago that it yielded to the market’s Q-culture. RBI Governor Duvvuri Subbarao, a half marathon runner himself, chose to become more quick footed in his responses and decided to come forward with a mid-quarter statement. While he did say in a recent speech that “Notwithstanding the scheduled quarterly and mid-quarterly reviews, we (RBI) reserve the right to alter our policy stance at any time to respond to the evolving macro-economic situation,” the fact is that once a date for making a statement gets fixed, the RBI comes under pressure, from public expectations, to say something or the other. If there was no scheduled mid-quarter statement to be made this Thursday, the question of what signals the central bank would like to send on inflation management would not have arisen quite as sharply as it has. Should the RBI raise rates? If so, by how much? If not, why not? Such are the questions being asked. Given conflicting expectations of bankers, who don’t seem to want a rate hike, and markets, that seem to expect a 25 basis points hike, it would appear the RBI has trapped itself into a position where it would be damned if it did, damned if it didn’t.
Has inflation gone away as a problem? While economists seem divided both on this question, and the related one of whether monetary policy can address the problem, business expectations are that growth would be hurt by seeking to contain inflation through more rate hikes. In India, there is always some confusion about what indicator should be used to draw conclusions about inflation. If core inflation is to be the policy barometer, the jury is still out on whether or not current trend warrants a rate hike. Equally, credit growth has not gone out of control.
On the other hand, with sceptics questioning the Union finance minister’s fiscal numbers, the RBI may feel obliged to act on the monetary side to rein in expectations. It is a Hobson’s choice for the governor. If he had kept the option to ‘respond when he must and when he can’ open, and not tied his hands by fixing a mid-quarter date, he may have been able to fudge his choices a bit more. With recent trade and industrial production data suggesting a slowdown in economic activity, and given current global uncertainties, this may have been a good time for RBI to lie low and wait, rather than act. If RBI had taken more decisive action last time, with a 50 basis points hike, it may have had good reasons for inaction at this time. Between no hike and a 25 basis points hike there isn’t much choice. Since no one wants a higher hike, and RBI may not feel sanguine enough to avoid a hike, it may settle for a neither-here-nor-there compromise. Since there is a date, one might feel compelled to make a proposition!