Just as well the RBI monetary policy statement came when the markets were already reeling under the twin blows of the volatility of the global markets and the revival of the long term capital gains tax after a lapse of thirteen years. Having taken a severe knocking in seven straight sessions, the status quo on policy rate did not seem to disappoint the markets. Indeed, it seemed to have been already factored in.
The reasoning underpinning the neutral stand of the central bank’s monetary policy committee, in fact, made a good case for a further tightening of the money market. Of the six factors listed, probably the most important was inflation. Retail inflation was already at a 17-month high at 5.21 percent in December last year, rising for the sixth consecutive month. RBI’s household survey reckoned that it could still be higher in the coming months. Inflationary factors were many. RBI Governor Urjit Patel himself talked of significant deviations from the path of fiscal prudence, as testified by the increase from the proposed 3.2 to the actual 3.5 percent fiscal deficit in the Budget for the current financial year.
Besides, the higher pay-out to government servants under the pay commission award, the hike in the import duty in the Budget on a number of goods, the promise to pay 1.5 times the actual cost of farm produce, higher house rent allowances, etc. would further harden inflationary pressures. Then there was the uncertainty in the global oil markets, though Patel conceded that crude oil could move both ways. In his press conference after the meeting of the MPC, the central bank chief was candid enough to admit concerns about the lack of pick-up in investment. Fiscal slippages were a reflection of multiple taxes on capital formation. The gross valued added projection at 6.6 percent in the current financial year was expected to yield higher growth, though the projection for the next financial year at 7.3-7.4 percent indicated a further boost in the GDP.
Happily, the decision to determine the benchmark rate by linking the base rate to the marginal cost of funds-based rate would help the retail borrowers due to better transmission of RBI’s monetary policy. Hitherto, big borrowers seemed to gain far more from the changes in PLR rather than retail borrowers. Overall, the no-change stance made immense sense given that there could be further pressures on the fisc with eight State elections and a general election due in the course of the next 14-odd months. Indeed, with the States running up over three percent of deficit of their own, a combined deficit of 6.5 percent or thereabouts is a warning signal which no central bank could have ignored. Maybe we will have to wait a while longer before the hoped-for return to a low-interest rate regime.