Government needs to keep prices in check

It was no surprise that the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) would maintain the status quo on interest rates at its December meeting. Retail inflation has been rising for the past few months and stood at 7.6% in October, well above the RBI’s comfort zone. The MPC’s inflation-targeting mandate prompts it to act when the rate goes above 6%. It has persisted with an accommodative stance now as boosting growth is to be given the priority, and the decision was unanimous. There is some concern over the outlook on inflation. The RBI thinks it will remain at 6.8% in the third quarter and will stay in the 4.6-5.2% range in the first half of next year. This is higher than its earlier predictions, but still it has refrained from taking recourse to liquidity management to contain inflation.

The RBI is aware of the risks of higher inflation but has given a rationale for adopting a dovish stance. Apart from food prices, core inflation is also inching up. But the RBI has thought that much of the present inflationary situation is caused by supply side issues, high margins of retailers and indirect taxes. It hopes that the arrival of the khalif crop in the market would ease the pressure. Retail margins are likely to reduce when supply links are restored. Consumer spending may increase in due course. There are conflicting interests and signals in the present situation but the message from the commentary of Governor Shaktikanta Das is that support for growth will continue to get priority. Since the present environment is special, the implication is that the RBI has to creatively adjust its policy to suit the requirements of the situation which is evolving.

Most central banks in the world have adopted similar policies. There is, in fact, a signal also that there may not be any more rate cuts in the coming few quarters, and the likelihood that the rates are at the bottom may give some assurance to the market. This will also ensure that the government’s borrowing programme will not be affected in the coming months. The economy is still in a bad shape in spite of the slight uptick being seen now. The RBI now has a slightly more optimistic view of growth and has put the contraction in GDP for the full year at 7.5%, up from its October policy forecast of 9.5%. It also expects the growth to turn mildly positive in the second half of the year. The RBI is helping the government in its efforts to spur growth. In its turn, the government should do its best to keep the prices in check.