RBI focus on inflation

Kashmir Times. Dated: 10/8/2018 12:30:33 AM

The central chooses to stick to its core mandate of maintaining the interest rate and ignores other pressures such as on Indian Rupee

By keeping its benchmark interest rate unchanged at 6.5 percent, the Reserve Bank of India (RBI) has pulled a surprise on the markets on Friday last week when the markets were reeling under the international pressure of slowdown. Apart from this, the central bank has ignored the inflation rate that has remained just around 4 percent notwithstanding other risks facing the economy at present when the global meltdown is hurting the Indian currency in an adverse manner. The BJP-government and its agencies including the central bank have refused intervene at this stage to check its downslide during the past few week when it has already crossed Rs 74 mark for a US Dollar. The RBI decision comes even as it has changed its policy stance from being neutral to calibrated tightening giving an indication that the interest rates could either go up or stay steady in the coming months. The signals coming from the market indicated that RBI would raise the interest rates by at least 25 basis points to support the Rupee, with some experts predicting that the rates could be raised by even 50 basis points. But the intervention of the central bank has not come to support the Rupee which continues to lose value against all the major international currencies. In fact, most of the Emerging Markets mainly India and Turkey have continued to face pressure on their currencies. In Pakistan, where the local currency was devaluing, the newly installed government has intervened in the market to check further devaluation besides the simultaneous measures announced in Turkey. These steps have saved their currencies from further devaluation when the Federal Bank of US decisions are helping in strengthening the Dollar against other currencies in the international market. The meltdown at the Wall Street has offset the decline in all the Emerging Markets across the globe and the Indian stock market shed major gains made in the past almost one year. In fact, the Indian stocks, which have been on a downtrend since September, also took a hit on Friday while bond yields fell. What is obvious is that, through its surprise decision, the RBI has chosen to stick to its primary mandate of keeping domestic inflation just around 4 percent. Notably, the Monetary Policy Committee’s (MPC) decision to keep rates steady was strongly endorsed by its members, with just a lone member voting against the decision. And its dedication to strict inflation-targeting was further reiterated during the press conference after the review meeting where RBI officials termed inflation control as their legal mandate.
Apart from this, the challenge now will be whether the RBI can manage various other risks to financial stability when the focus is only on inflation control. At present, it appears that the RBI is more interested in piecemeal measures, such as easing foreign investment norms and low key intervention in the foreign exchange market to address the financial risks posed by the weakening Rupee. Moreover, the decision to keep rates unchanged, particularly after two consecutive hikes since June, can be perceived as a strategy to keep the powder dry just in case external risks get out of hand. In this sense, the RBI’s decision could be described as prudent. The decision to keep rates steady might also work in favour of the government, which will prefer to borrow at cheaper rates in the run-up to the General Elections next year. The yields from bonds have been on a steady rise since last year as investors have been spooked by fears over the fiscal deficit and the shift in global interest rates. The RBI’s decision to not raise rates may lift the sentiments of consumers and businesses at a time when the economy enters the busy season and festival demand picks up. Going forward, the biggest challenge facing the RBI will be the prospect of further rate hikes by the US Federal Reserve and central banks in other developed economies, which could force the central bank to look beyond its inflation mandate. The RBI will clearly have to juggle multiple challenges in the coming months when the US Dollar is strengthening and other currencies weakening despite economic slowdown around the world.

 

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