The just announced move by the Reserve Bank of India to keep the interest rates unchanged (link to the FE story on this today) has come as a disappointment to some of the leading monetary policy experts and economists. Not wanting to be named, most felt the policy stance seemed at variance with the central bank’s own forecasts on inflation.
The RBI following its first monetary policy review meeting for the financial year 2022-23 has chosen to keep the repo rate unchanged at 4 per cent, now famously reported across news publications as a practice for 11th time in a row.
Consider this: In his statement on Friday, April 8th, the RBI governor Shaktikanta Das pointed out that the “inflation is now projected at 5.7 per cent in 2022-23 (with Q1 at 6.3 per cent; Q2 at 5.8 per cent; Q3 at 5.4 per cent; and Q4 at 5.1 per cent).” Contrast this with the RBI’s earlier monetary policy statement on February 10th, when it was stated that the “CPI inflation for 2022-23 is projected at 4.5 per cent (with Q1:2022-23 at 4.9 per cent; Q2 at 5.0 per cent; Q3 at 4.0 per cent; and Q4:2022-23 at 4.2 per cent).”
Also, read: RBI MPC meeting: As RBI focuses on withdrawal of loose policy, economists see interest rate hike in August
The governor attributed the revision of the interest rate forecast from 4.5 per cent to 5.7 per cent primarily due to Ukraine-Russia “war-induced factors” that have impacted prices of crude oil, edible oil, wheat and feed and that the revised inflation rate assumes crude oil at $ 100 a barrel.
However, talk to economists and those who have followed the monetary policy stance in the country and there is concern. This is even as the the RBI governor states rather assuringly that the central bank intends to stay watchful and that it is “not hostage to any rulebook and no action is off the table when the need of the hour is to safeguard the economy.” Also, it helps listing to the pecking order of priorities: “our goals,” says the RBI governor “of price stability, sustained growth and financial stability are mutually reinforcing and we continue to be guided by this approach.” The key message in his statement here being to showcase a resetting of the priorities and putting inflation ahead of growth.
So, the interpretation by some of the economists reading this is that the central bankers may change policy and tighten liquidity as they go along but the issue is given the forecast of inflation for the first quarter of 2022-23 at 6.3 (5.7 per cent for the year) then should not the real rate of interest be at least one per cent more. The question therefore is to what extent is the current policy on interest rates consistent with the central bank’s own forecast on inflation.
The other concern is on growth. While RBI statement talks of focus on growth and an improvement in the capacity utilisation in the manufacturing sector recovering to 72.4 per cent in Q3: 2021-22 from 68.3 per cent in the previous quarter, surpassing the pre-pandemic level of 69.9 per cent in Q4:2019-20, the fact remains that the credit growth is still to get into double digit zone. Not to miss the fact that the growth after all, is dependent of several factors and availability of liquidity and credit is only one part of it.
Also, read: When will RBI raise repo rates? Experts assess what Shaktikanta Das-led MPC will do if inflation runs high
The market has already done its interpretation of the monetary policy and the bond rate has gone up. The yield on 10 year government bond having already crossed 7 per cent.
Low interest rates, some argue, also reduces the cost of public borrowing but the government cannot keep borrowing at lower rates of interest as it is contrary to the normal demand theory that if you want more then you need to pay a higher price. After all, one cannot invite a scenario where the borrowing happens at a negative real rate of interest, even if the borrowing is to intervene in areas where market forces fail and direct transfers to the poor need to be made. The inescapable question that therefore comes across is who is paying the price of it all? At the end of the day, it is the savers who are paying the price. Today, for instance, the rate of interest in banks, on one year deposit is less than the 5.7 per cent in most cases and perhaps in the leading public sector bank, while the rates are similar, it is only for senior citizens that the interest rates are a shade over 6 per cent for a long term fixed deposits. The burden is apparently already being borne by the savers and some therefore argue that a continued unchanging stance could well be seen as, what a pensioner in a bank, preferred to call a trend towards “squeezing the middle class if not getting to financial repression.”
