Everyone had assumed that the latest monetary policy statement of the Reserve Bank of India would be entirely on predictable lines, and because of that it would be reduced to being a non-event. A mid-quarter review such as this one, as a rule, causes much less excitement than, say, a quarterly statement. It must be pointed out, however, that recently the RBI has not been strictly adhering to those conventions. In fact, it has even said that monetary changes such as repo hike need not be confined to policy dates. Besides, the RBI Governor has not been loath to interacting with analysts and the press even on what are considered to be relatively less significant occasions.

But there was another important reason why not just the markets but practically everyone else thought that the monetary statement of December 18 could be predicted. This was because inflation data, both retail and headline inflation, seemed to effectively pre-empt any other course of action. An overwhelmingly large number of bankers and brokers had assumed that a repo rate hike of at least 0.25 percentage point was on the cards, with a few of them even anticipating a 0.50 percentage-point rise. With the RBI expected to remain steadfast with its commitment to price stability (without, of course, ignoring growth needs), the high inflation figures seemed to dash any hope of a rate cut. Even a holding operation — maintenance of a status quo — seemed unlikely.

That is why there were very few voices clamouring for a softer interest rate policy.

Rising inflation

WPI inflation (headline inflation) rose to a 14-month high of 7.5 per cent in November against 7 per cent in October. A week earlier, CPI inflation soared to 11.2 per cent up from 10.2 per cent. Quite crucially, food prices were blamed. According to an analysis by rating agency Crisil, what is particularly worrying is that core inflation also rose marginally in November.

Almost every serious analyst thought that even if primary inflation were to moderate in the coming months, inflation in manufactured products would go up, and the RBI would continue to be hawkish.

In the event, on Wednesday, the RBI’s decision to hold on to the rates came as a total surprise

But it must be noted that the RBI’s reading of the economy and broad inflation trends are in line with what majority thinking. Where it differs is in the conclusion that food prices dropping sharply even from December onwards will provide comfort. According to the policy document, a sharp reduction in the prices of food articles, of which there was evidence already, along with a few other factors such as exchange rate stability, has prompted the RBI to hold the rates at least for now.

There have been two types of reactions. The stock markets, industry associations and public sector banks welcomed the move. For some of them, so rooted was the expectation of a rate hike that the status quo was to be welcomed. In this category has been the rather exaggerated claim the RBI had opted for growth, tilting the focus of policy away from inflation, on which, of course, it will maintain vigilance. This view is based on the explicit recognition that in the context of a weak economy, an overly reactive policy (to contain inflation) may be counter-productive

A second set of reactions was less favourable. The RBI’s inaction, in the context of the Governor’s consistently tough talk on inflation, somehow underlines the apex bank’s credibility. A rate hike has only been postponed not abandoned. Food prices may indeed come down temporarily but the long-term prognosis is not bright.

The RBI has admitted that the policy decision has been a close one. There is merit in waiting for more data to reduce uncertainty. But there are obvious risks to that approach. The RBI may be perceived to be going soft on inflation. In a stunning coincidence, another risk materialised on the same day is the policy announcement — the tapering of bond prices by the U.S. Federal Reserve. How well the monetary policy copes with the repercussions is something everyone will be watching.

narasimhan.crl@thehindu.co.in

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