Friday’s decision by the Monetary Policy Committee (MPC) of the Reserve Bank of India to maintain status quo on benchmark interest rates and continue with an accommodative policy stance for “as long as necessary” has been widely welcomed as being ‘pro-growth’. With the MPC noting that the signs of economic recovery were still far from broad-based, the panel asserted that it was incumbent on policymakers to support a durable rebound. The MPC also flagged its expectation that inflation would continue to “remain elevated” through the coming months to average 6.3% — well above the 6% upper bound of its target range — through the second half of the current fiscal. The RBI, which in October estimated retail inflation to range between 4.5% and 5.4% in the six-month period, has in just two months raised its projection for price gains by at least close to one percentage point. Seen in this light, the MPC’s decision shows that the RBI is clearly prioritising growth over price stability for now. While the compulsion to ensure that monetary policy remains broadly supportive of an economy that is in recession as a fallout of the COVID-19 pandemic and accompanying lockdowns is understandable, the rate setting panel’s readiness to shrug off both persistently high inflation and its own outlook on prices is cause for concern.
Recent increases in the prices of iron ore, steel and transportation fuels also add to the worries that cost pressures are continuing to accumulate at a time when the economy is still well under water. The RBI has also, surprisingly, raised its GDP forecast for the full year. The central bank now expects the economy to shrink by only 7.5% in the 12 months ending in March, a full 2 percentage points shallower than the 9.5% contraction it had projected in October. The forecast is predicated on a return to growth of 0.1% in Q3 and 0.7% in Q4. It is this ostensibly sanguine outlook on the economy that is hard to square with the RBI’s stand according primacy to growth over price stability. With the central bank prognosticating that, save some possible continued softening in the prices of cereals and transient easing of vegetable costs through the winter, other food prices would persistently remain at elevated levels, the MPC’s policy approach is clearly fraught with risks. By laying the onus on supply disruptions, profiteering and taxes for the inflation spiral, the RBI is abdicating its primary mandate.