A chakravyuh test that an embattled RBI faces
PremiumIndia’s central bank seems to have a better handle on inflation than the US Fed right now. But the actual challenge lies ahead and RBI must resist over-confidence as much as rising prices
An experience of double-digit inflation about a decade ago led the guardian of our currency, the Reserve Bank of India (RBI), to propose an explicit policy of price stability. Nearly six years after it was set a retail price-rise target of 4%, with leeway of 2% plus or minus, we are in a remarkable situation. While the US central bank appears in a flap over a price flare-up there, with another promise made on Monday to quell it by withdrawing its monetary fuel faster than planned if need be, RBI has expressed confidence in its ability to keep prices in control after its own infusions of pandemic liquidity. As seen after America’s Great Recession of 2008-09, a policy rate formation of ultra-cheap credit is easy to enter, but very difficult to exit without causing financial spasms. Today, the US stares at a possible recession as high prices force lending rates up. In contrast, RBI offers a picture of calmness. As Governor Shaktikanta Das said on 21 March: “At RBI, the day we announced that we will enter that chakravyuh, we planned an exit route also, and we would come out smoothly." This analogy for a loose-money policy placing RBI in a tight spot that few know how to escape is taken from the epic Mahabharata. For the sake of our economy, it had better not be just a boast.
To secure an economic recovery from covid, RBI has been extra ‘accommodative’, having slashed its policy rate to 4% and aimed fluid supplies of credit at specific business sectors. Most of the ₹12 trillion worth of cash injections made over the pandemic period, however, had a “sunset date"; ₹5 trillion of it has already returned, Das said, while the rest is due over the next year or so. In recent months, RBI has also used unusual tools to keep a lid on money market overflows. All this would suggest a fine sense of cash calibration. Also in its favour is the fact that inflation has not breached our upper tolerance limit of 6% for three successive quarters, which would officially qualify as an RBI failure, ever since that target was adopted in 2016. Yet, if our central bank has a special formula to get us out of tight spots, its real test lies ahead. The incline of India’s retail index has been above 6% for the past two months, even as we face a war-triggered oil spike that has sent inflation-targeters elsewhere into a scramble to tighten money and restrain both demand and prices while trying to minimize the resultant pain in terms of job losses. As wage spirals are rarely a worry in India, our labour market enters RBI’s calculus only indirectly—as a loose function of economic growth. But then, pain infliction here typically takes the shape of inflation, which is harsher because it hurts almost everyone, especially the hard-up.
Even before India was threatened with war-inflated import bills, RBI was seen to have fallen behind the curve on price control. It was clear months ago that covid supply snarls would persist. Now a geopolitical rupture could spell new constraints even as various commodity prices soar globally. After years of repressed spending, should private demand take off as expected by our fiscally-expansive government, domestic prices could zoom. Our wholesale index has risen by double digits and buoyant bond yields signal a broader outbreak ahead. If RBI still opts to retain its 4.5% price-rise forecast for 2022-23, a figure Das has shown no inclination to revise, without a rate-led reversal of loose money, it may be taken as a sign of fiscal over-dominance. And that could threaten its credibility as an inflation fighter.
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