The Reserve Bank of India’s Monetary Policy Committee has since inception retained its unwavering focus on its primary remit: the preservation of price stability. It follows then that the central bank’s rate-setting panel opted to leave benchmark interest rates unchanged and retain a neutral stance to achieve the medium-term target of keeping Consumer Price Index inflation close to 4% on a durable basis, while supporting growth. Spelling out the rationale for the decision, the MPC felt that with global crude oil prices having “firmed up further” amid a pick-up in demand and tighter supplies in the wake of OPEC’s production cuts, the threat of upward pressure on accelerating inflation has increased appreciably. Add to this the uncertainty posed by the prospects of weaker-than-anticipated kharif crop output and the impact this may have on food prices, and the concerns agitating policymakers will be evident. There are also the not-so-small matters of farm loan waivers by States that could roil the quality of public spending and exert price pressures — as well as the question of when States may decide to implement their own salary and allowance increases in the wake of the Centre’s Seventh Pay Commission implementation.
As the statement accompanying the rate decision points out, CPI inflation has risen by around two percentage points since the MPC’s last meeting in August: from 1.46% in June 2017, to a provisional 3.36% in August. The RBI’s September survey of household inflation expectations too has shown in qualitative responses a marked uptick in the proportion of respondents expecting the general price level to increase by more than the current rate. The welter of domestic pressure points on prices has also coincided with, in the MPC’s words, “an escalation of global geo-political uncertainty and heightened volatility in financial markets due to the U.S. Fed’s plans of balance sheet unwinding and the risk of normalisation by the European Central Bank.” In the face of such a “juxtaposition of risks” to the outlook for price stability, the overwhelming majority of the MPC’s six members saw little choice but to hold rates; there was a solitary dissent vote for a 25 basis points cut. The RBI’s policymakers simultaneously raised their inflation projection for the second half of the current fiscal to a 4.2-4.6% range and cut the estimate for real Gross Value Added growth this year to 6.7%, from the August forecast of 7.3%. Reiterating the urgent imperative to “reinvigorate investment activity” to spur growth, the MPC has laid the onus squarely on the government’s shoulders: from suggesting the recapitalisation of stressed state-owned lenders, to calling for further simplification of the GST regime and urging that stalled public sector investment projects be restarted. The baton has been passed and now it is for the Centre to do the running.