No Second Guessing Here

The Central Banker’s tough stance on inflation lays to rest the questions on its autonomy, writes Clifford Alvares.

- Clifford Alvares

IF THE RBI’S RECENT CREDIT policy is anything to go by, talk of whether the central bank is really an independent institution is proving just that, mere talk, considering that the RBI walked the path on its mandate of inflation-targeting keeping aside economic-growth considerations for the moment.

Against the wide expectations of bankers, economists and industry stalwarts, the Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel, did not let its guard down against inflation. The RBI in its announcement on 8 February kept the repo rate or the lending rate status quo at 6.25 percent.

After the demand-squeezing effect of demonetisation, a rate cut was seen as a kick-starter to the economy. A 25 basis point rate cut would have spurred more dips in rates, which could have brought back demand for automobiles and housing.

Well, RBI is doing no such thing and, to top it, the central bank has altered its policy commentary from ‘accommodative’ to ‘neutral’, which came as a shocker to the financial markets. The impact on bond markets was knee-jerk. The 10-year government securities (G-sec), which dipped to 6.4 percent post-demonetisation, climbed to 6.7 percent, back to its pre-demonetisation levels (See chart: Back To Square One).

The RBI has had an ‘accommodative’ stance on interest rates for some time now implying a general downward bias in interest rates. The rates have been on a downward trajectory for the past two years, since January 2015, with cumulative cuts of 175 basis points till date.

“Markets were expecting a rate cut, but the full impact of the demonestation is still unclear,” say Kuntul Sur, Partner, Risk and Regulatory, PwC India. “This is an apolitical move and I don’t see any influence whatsoever.”