The unanimous decision by the Monetary Policy Committee of the Reserve Bank on Wednesday to raise the benchmark rate by 25 basis points was widely expected. In fact, several major banks in anticipating had raised their lending and deposit rates a few days prior to the MPC decision. Even the share markets seemed to have taken the hike into their stride, with the Sensex registering handsome gains.
The positive streak on the markets continued for the second successive day on Thursday, proving that the policy rate hike was not a negative for the economy. Given its mandate to keep inflation within the 4-plus two per cent band, what weighed with the MPC was the uptick in the consumer price inflation in recent weeks. The consumer price inflation, excluding food and fuel, had risen by 80 basis points since March. The expectation was that in the first half of the current financial year inflation will rule at 4.8 – 4.9 per cent, and 4.7 per cent in the second half. Previously, the RBI had projected 4.4 percent inflation in the second half of 2018-19. There were many factors for the MPC to be concerned about the uptick in inflation. As the policy paper noted, India’s fuel basket was up 12 per cent since April — from $66 per barrel to $ 74 a barrel. Commodity prices, too, were rising.
Domestic factors also could prove inflationary. The higher house rent allowance for central and state government employees, the most likely higher minimum support prices for the coming kharif crops, etc were some of the genuine reasons for being cautious. What the MPC did not say but what must have been in the back of its mind is the fear that in the election year, both the central and state governments could loosen the purse strings, thus putting pressure on the fiscal position and adding to the inflationary pressures in the economy. The continuing agrarian distress and the tremendous pressure for a fresh round of loan waivers could distort the fiscal position of the states. Besides, the upward trend in global crude prices was still persisting. Happily, the economy was now picking up with the negative pressures having spent themselves. There was improved capacity utilisation and better credit off-take. The central bank has projected 7.4 per cent growth in the current financial year.
However, what could spoil the RBI party, one genuinely fears, is the reckless spending by various governments. The newly-elected Karnataka Government, with an eye on the next Lok Sabha poll, is determined to write off nearly Rs 60, 000 crores of farm loans. Other governments, too, might fall prey to the populist game. Even the Centre, still resisting pressure on fuel prices, cannot be relied on to stand steadfast on the path of fiscal prudence. Yet, it is a hopeful sign that the consumer price inflation is under control while the economy is beginning to pick up momentum after the twin shocks of demonetisation and haphazardly implemented GST.
