The Reserve Bank of India (RBI) lived up to virtually everybody's expectations by not moving a centimetre on its monetary stance. Over the past six months, it has been asserting its determination to place the inflation-fighting objective above all else. Its decision to stay put, reinforced by hints that it will maintain its position two months from now, has been placed in the context of still-significant inflationary risks. It does not see the recent moderation as a sustainable phenomenon, particularly since much of it was due to softening food inflation, which is now under renewed threat as a result of the El Nino phenomenon. This apart, the policy statement also highlights the fact that core consumer price inflation - measured excluding food and energy - remains obdurately high at about eight per cent. This is interpreted as reflecting the persistence of demand pressures - which may be somewhat difficult to swallow, considering that growth is so sluggish. A more likely and, from the policy perspective, equally legitimate reason is that the prices of services that are included in the consumer price index (CPI) basket are being driven higher by persistent wage pressure, which reflects the inflationary expectations of workers. A tight monetary policy stance is supposed to moderate these expectations, but, in the Indian context, it is apparently competing with other forces - notably high food inflation. Both the RBI and the government should be concerned about a Catch-22 situation, in which tighter monetary policy is continually countered by rising wages driven by food prices.
This dilemma is all the more significant because the RBI does not see any signs of a growth recovery in the current year. It obviously cannot express a view on the outcome of the elections, but whatever this might be, it apparently believes that there will not be an immediate impact on growth - which is expected to climb marginally to 5.5 per cent, albeit with some downside risks. The message to the government that is being strongly reinforced by the tone of this statement is that if the economy is to return to a high growth-low inflation trajectory, the ball is squarely in its court. Whether the government that assumes office in May will rise to the occasion is difficult to predict, but it might be hoped that all the people advising potential prime ministers are seriously thinking about these issues.
This being the first policy announcement of the financial year, it had a regulatory component as well. RBI Governor Raghuram Rajan has articulated a five-pillar framework for financial sector development, and the policy statement reports activity on all fronts and outcomes on some. The initiative to move the money market from the predominantly overnight tenure to longer tenures is being attempted by lowering the ceiling on banks borrowing from the former while raising it on the latter. Various elements need to be put in place to energise the government securities market, of which this move is one. But it will be a long grind. Beyond this, the deadline for the implementation of Basel III norms by Indian banks was postponed by a year, to March 2019, buying banks a little more time, though the challenges will still be immense. Overall, befitting the transition in government, this was a policy of suspended animation.
