This monetary policy focuses on restoring RBI’s credibility as an institution that both understands the dynamics of inflation and can fight it effectively. It does so by, first, painting a more realistic picture of the inflation outlook for the year ahead, instead of merely producing a set of optimistic estimates that are likely to go wrong.
Thus, it is remarkably candid about the fact that given the various local and global factors at play, inflation is unlikely to go down in a hurry in the near term — in fact, it could get worse before it moderates. As far as its inflation-fighting credentials go, it seems to have responded to the critique that its calibrated approach towards rate hikes had put it hopelessly behind the curve. Hence, we get a half percentage point hike in the repo rate instead of the usual quarter.
The policy’s emphasis on the fact that over the medium term there is no trade-off between growth and inflation should put the (often confusing) ‘growth versus inflation’ debate in perspective, though RBI seems quite certain that in the short term, growth could take a hit. In fact, its baseline growth projection for 2011-12 is a conservative 8 per cent.
The move towards a single rate regime came rather quickly in the wake of the expert committee’s recognition and will go a long way in reducing volatility in the money markets and also help in the transmission of policy signals.
Abheek Barua, Chief economist, HDFC Bank
