Growth push over inflation

RBI’s main concern remains growth, and policy support is required for a durable recovery

The Reserve Bank of India (RBI) kept all rates unchanged, retained its easy money stance — decoupling India’s monetary policy from ones across the world, where central banks have started tightening rates or suggested that they will — and indicated that its focus remains on growth. Ahead of the monetary policy, most economists recommended that RBI shift its focus to inflation, and a majority expected a marginal increase in the rate at which it borrows money from commercial banks, effectively reducing flow of money in the market. RBI has chosen to do neither, which is surprising. With fiscal policy doing its bit, monetary policy should have ideally started looking at the risk posed by inflation.

The central bank’s move raises two questions. One, what does it know about growth that we do not? Two, will its gamble on inflation pay off? In 2022-23, RBI expects the economy to expand by 7.8%, lower than the International Monetary Fund’s estimate of 9%, but also lower than the Economic Survey’s projection of 8-8.5%. According to the Monetary Policy Committee (MPC), growth across the four quarters of 2022-23 will be 17.2%, 7%, 4.3%, and 4.5%. Clearly, RBI expects a moderation in the growth rate through the year. Retail inflation in December was 5.6%. RBI expects an average of 5.3% in 2021-22 (5.7% in the current quarter), falling sharply to 4.5% in 2022-23. This disaggregates across the quarters as 4.9%, 5%, 4%, and 4.2%. RBI’s comfort level is 4% ± 2%. The projections suggest that RBI expects a dip in oil prices through the year, an assumption that the Economic Survey also makes (it assumes prices to be an average of $70-75 a barrel in 2022-23; which would mean a fall from the current $90+ levels).

Seen together, the import of Thursday’s decisions by RBI’s MPC indicate that the primary concern remains growth — unlike in many of the western economies, where the focus of central banks has shifted to managing high inflation. RBI governor Shaktikanta Das said as much while announcing the policy — that MPC believes policy support is required for a durable, broad-based recovery. This will continue “as long as necessary to revive and sustain growth,” he added. Mr Das said pretty much the same thing after the last MPC meeting, and given that broader economic data does show that private consumption (and private investment) is yet to pick up, it’s hard to find fault with this approach. That, though, only highlights the fundamental dissonance in the policy: A central bank that has played safe

(and justifiably so) when it comes to growth has chosen to gamble on inflation easing.