The day RBI moved the rates

Finance ministry was keen for more accommodation to keep the growth trends going even at the cost of higher inflation, but the numbers gave little choice to Mint Road

A favourite allusion to describe balancing complicated options is how a juggler plays and keeps the balls in the air. Right now, the allusion does not even begin to describe the competing choices the Reserve Bank of India (RBI) has had to juggle to decide on raising interest rates. To do all that and yet keep the central government pleased with the show is impossible.

Any option the RBI will focus on will come at the cost of dropping the ball for something else. Inflation is rising. That is terrible news for all consumers, but it also means good news for manufacturers, who are just starting to get their production lines into place after two years of Covid induced downtime. Higher prices also hurt those who save their money in banks and post offices since their income falls, but those high prices also encourage business owners to hire more workers after a long layoff.

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Deciphering the impact of inflation is bad enough. This is an impossible act to read with a war creating a shortage of supplies. Rising coal and oil prices in the international market mean a difficult summer is upon us, as power plants run dry and fans come to a stop. But when climate advocates wish coal and oil supply remain short to help pave the way for the switchover to renewables, even amid the crisis, temperatures can rise. Of late, climate pashas have been vigorously pushing central banks to take a position on these issues, and the RBI has also faced these demands.

This is why RBI Governor Shaktikanta Das and the monetary policy committee have agreed they should stick to basics. The decision to raise interest rates all around is meant to do just one thing - make the cost of taking out credit higher. This could hurt those wishing to take out small loans to finance an air conditioner or an industry captain planning to expand her factory's production line. But as the rapidly growing tax receipts from GST and the equally robust PMI data on the manufacturing and services sectors show, people have more reasons to borrow than just the offer of cheap credit.

It also means helping those who can't afford to pay the costly credit and will have to be subsidised through fiscal policy. The banks will not any further take up the responsibility of keeping their enterprise alive. This means the pressure to provide a safety net for entrepreneurs at the lower end of the income stream will now be that of the finance minister, Nirmala Sitharaman.

It is quite a phase change. After two years of playing the champion rescuer of the economy hit by the Covid pandemic, the RBI has now decided to focus only on its core function—keeping inflation under control. Of course, ever alive to political cross currents, Governor Das said, "Sustained high inflation…has pronounced adverse effects on the poorer segments of the population by eroding their purchasing power." He is also correct.

This has been a difficult choice. One understands that the finance ministry was a bit keener to push for some more accommodation to keep the growth trends going even at the cost of higher inflation, but the numbers gave little choice to Mint Road. The consumer price inflation for April is expected to be massively high. Once the US Federal Reserve raised rates, it would be foolish for any foreign investor to hold any Indian rupee. After making allowance for exchange rate differentials and the administrative costs of liquidating holdings, the US dollar will be way more attractive than an investment in the Indian rupee.

The only way to stanch this drain on the reserve was to make the interest rates on the Indian currency higher. It changes the math in favour of India. The risks had become too high to do otherwise.

(Subhomoy Bhattacharjee writes on business and economy)