For many reasons, the Reserve Bank of India’s forthcoming bi-monthly policy statement for 2014-15 will be unique. The idea to have a policy statement once in two months was mooted by the Urjit Patel Committee. The RBI is signalling acceptance of some of the recommendations, which do not involve discussion with the government. However, the core recommendations of the Committee’s report involving inflation targeting and shifting the monetary policy’s anchor to CPI (retail ) inflation, instead of WPI, will be implemented only after a consensus is reached.

It is most likely that the RBI will spell out its approach to this important report but no major decisions can be expected. As of now, inflation targeting is not easily understood in the Indian context.

The RBI Governor has said that it will be flexible, which suggests that even when it is adopted formally, the central bank will have some leeway to adjust the target rate and or timeframe.

Two important issues confront the RBI. In the run-up to the elections — with the model code in force — how far could it go in deciding policy issues? Even on new bank licences, a subject that has taken a long time and is in the final stages, the RBI is not expected to announce the first few licensees.

Although it is not clear that even continuing policy initiatives should be halted temporarily until after the new government is formed, the RBI might play it safe. The RBI Governor has said that the Election Commission will be consulted.

A suggestion has been made before whether the monetary policy itself could be deferred after the Union Budget for 2014-15 is presented by the new government in June 2014. This would be on the pattern of government withholding policy measures.

For the past so many years, however, elections have not inhibited monetary policy. There is no reason to think that it will be different this time. But it is a safe bet that no “big-bang” announcements will be made.

The second dilemma is specific to monetary policy. Both WPI and CPI inflation have come down. CPI inflation is down by 300 basis points over the past three months. Without formally adopting it as the policy anchor, the RBI has shown its preference. However, no change in interest rate stance is expected.

A sharp fall in food prices has driven down inflation. That could be a temporary phenomenon; the possibility of food prices reversing is real. In important vegetable producing states such as Maharashtra, unseasonal rains and hailstorm have damaged crops. This will impact on inflation numbers.

Yet with CPI inflation very close to the RBI’s March 2015 target of 8 per cent, the RBI will most probably talk of increased upside risks to justify its holding of rates in the forthcoming policy statement. The other alternative of revising the 2015 target might not be practicable. As it is, the March 2016 target of 6 per cent (as per the Patel Committee report) looks daunting.

As has been the case with every policy statement, the RBI’s views on the macro-economy will be keenly watched. The union budget postulated a GDP (gross domestic product) growth rate of 5.5 per cent for 2014-15. In the recent past, even the normally conservative RBI had to lower its growth estimates. There are any number of uncertainties on the macro-economic front. After a record run of favourable monsoons, the El Nino effect can impinge on monsoons, and, hence, output. Administered prices will have to be revised upwards. External account parameters might be much stronger than they were a year ago, but extreme vigilance is still called for.

Monetary policy’s traditional dilemma of growth versus inflation can never be wished away.

In line with its recent thinking, CPI inflation will be in focus. The CPI index gives more weight to food and it is on this that inflation expectations are based.

The forthcoming policy will be the last before general elections, which commence a few days after the RBI policy. The fiscal stance of the next government will obviously matter in policy formulation.

All these suggest a neutral policy announcement on Tuesday— a status quo on the interest rates. As always, broad macro-economic trends will be discussed.

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