If you feel the monetary policy review has turned a boring affair every two months with no action on any front, then I won’t blame you.
The last time there was any action was in February 2023 when the repo rate was hiked by the Reserve Bank of India’s Monetary Policy Committee (MPC) by 25 bps to 6.5 percent to contain simmering prices.
On the stance front, the rate-setting panel seems to have frozen on ‘withdrawal of accommodation’ since June 2022.
All that is delivered every two months since more than a year-and-a-half include some ups and downs in the projections for economic growth and inflation, and some announcements on banking sector functions, leaving the monetary policy reviews non-events.
And, this is how it is likely to be for the rest of the year too, as 4 percent inflation is likely to remain elusive till the fourth quarter, going by the central bank’s own admission.
But that’s how the monetary policy reviews work.
A no-action policy is also a good action at times!
Let’s try to understand why.
Unending battle against price rise!
The RBI’s key objective is to tackle inflation and restore price stability in the economy.
What is this inflation that’s dogging us? In simple words, this is a key economic indicator or price levels of most commonly used goods in the economy. For instance, the prices of vegetables and cereals we consume on a daily basis and other major commodities such as oil that has a bearing on everything in the economy. Inflation gauges the overall price trends on the ground. If inflation is not tackled, the value of money that we hold in our wallets declines over time.
What is this decline in the value of money? Well, it is a situation where you need to pay more for less such as something that you could buy for Rs 100 last year may cost you Rs 120 now and Rs 150 a few months down the line, no matter whether your income has gone up or not.
High inflation curtails the purchasing power of individuals and causes a ripple effect on businesses, taxes, and revenues.
You might have seen your Rs 10 biscuit packet gets smaller every year. That’s because some smart companies do not hike prices and, instead, cut the quantity offered for the same price. That’s called shrinkflation.
For all these reasons, the RBI is most worried about inflation before anything else, including economic growth.
The monetary policy committee sets the repo rate or the rate of interest that the central bank charges when it lends money to commercial banks. The central bank hikes the repo rate to make borrowings costlier, which eventually reduces the money supply in the economy and, thereby helps contain inflation. Essentially, the RBI-led MPC sets the interest rates to control demand in the system making money costlier or cheaper.
In the last eight monetary policy reviews, the MPC has been on a pause mode as far as rates are concerned because it is waiting for inflation to sustainably ease to 4 percent levels which is its medium-term target.
Not so long ago, the RBI had to once publicly admit its failure in keeping inflation within the target. That was egg on the face of India’s rate panel. It wouldn’t want to go back to that situation again.
Hence, the caution this time.
No action in RBI policies simply means that the interest rates continue to be on the higher end in the economy.
The RBI is fighting many battles on inflation management. A premature reduction in interest rates would spur demand but that could be counterproductive in managing inflation. That’s one of the risks it counts.
A potential failure of monsoon could be another. Any slippage in fiscal consolidation by the government is a third risk. A global commodity price upswing is a fourth.
The good news is that a healthy economic growth momentum gives some elbow room for the RBI to keep up its fight against inflation.
So, when will inflation fall in line?
Last week, the MPC yet again chose not to do anything with interest rates and said they will wait till retail inflation falls to 4 percent medium term target and stays there in a sustainable manner.
But that’s unlikely to happen soon.
One needn’t be an economist to understand why. Look at the central bank’s own inflation projections.
Assuming a normal monsoon, CPI inflation for 2024-25 is projected at 4.5 percent with Q1 at 4.9 percent, Q2 at 3.8 percent, Q3 at 4.6 percent and Q4 at 4.5 percent. That means, except for a blip in the second quarter, inflation is likely to stay well above its 4 percent target till January-March period of fiscal 2024-25.
Except two members on the MPC board—Ashima Goyal and Jayanth Varma—no one seem to disagree on the point that interest rates should be on hold till inflation eases to the 4 percent target and monetary policy stance should remain withdrawal from accommodation.
Both Goyal and Varma voted this time in favour of a 25 bps rate cut and change in stance to ‘neutral’.
So, in a way, that settles a debate on what will happen to the interest rates till March next year—unless some major surprises spring up on the inflation trend or the MPC shifts its position.
In this backdrop, at least some of you may have a question in mind. Why is MPC meeting every two months if there are no key changes expected to be reviewed?
In fact, the bi-monthly policy reviews were not the case always.
Till mid-90s, the RBI used to conduct only two monetary policies in a year. However, after Bimal Jalan took charge as the governor, the RBI shifted to quarterly review announcements. The RBI shifted to the bi-monthly monetary policy schedule only in April 2014.
Since the current setup is reviewing monetary policy every two months, what we are effectively going to see is no-action on the monetary policy front till March 2025.
To sum it up, monetary policies will continue to remain boring for the rest of the year. But, as I said, sometimes boring policies are also good.
Do you agree?
(This article first appeared on Moneycontrol)