Except the Chanakya entry, Das’ inflation-fighting script remains the same

Since May 2022, the regulator has hiked the repo rate by 250 basis points to counter inflationary pressures, and for the last four MPCs the repo rate has remained unchanged.

On 6 October, the Reserve Bank of India (RBI) Governor Shaktikanta Das began his address by quoting the ancient Indian economist and philosopher Kautilya (also known as Chanakya).

Das said the words is Kautilya’s Arthashastra that says--stability enables a state not only to share its wealth equitably but also augment it--remains relevant even today.

That’s the only new portion in Shaktikanta Das’ inflation-fighting script in the October policy statement. Everything else—the decision to continue rate status quo and continuation of monetary policy stance—remains the same. Even the inflation target for the current fiscal year was retained as 5.4 per cent.

One can't blame Das for repeating the script. Between the last policy review and this one, nothing much has changed on the inflation front. Price rise remains the key concern, despite some easing of core inflation, for policy makers.

Also Read: RBI holds repo rate at 6.5%, inflation focus continues

As expected, Das voiced the intent of majority of the monetary policy committee (MPC) members to continue the war on high inflation that is hurting the common man in Asia’s third largest economy.

Inflation ruled the show with Das using the word 38 times in his policy statement as against growth (21 times).  The message is crystal clear—don’t expect us to shift the focus from inflation. Everything else can wait.

Clearly, the move came on the expected lines and as predicted by a Moneycontrol survey of top economists early this week.

Das' language is of extreme caution. The MPC doesn't want to repeat the mistakes of the past when it had to publicly admit inflation management failure.

A hawkish policy statement is logical considering that inflation continues to be the key villain in the India growth story. Between the August policy review and now, nothing much has changed on the inflation front. In fact, two consecutive months of CPI inflation above the 6% upperband has clearly worried Das’ inflation warriors.

The retail inflation fell to 6.83 percent in August as vegetable prices cooled somewhat compared to the previous month. At 6.83 percent, the Consumer Price Index (CPI) inflation print for August is 61 basis points lower than July's 15-month high of 7.44 percent.

However, inflation has remained above the upper band (2-6 per cent) of RBI’s tolerance for two consecutive months. It is also the 47th month in a row that it has stayed above the central bank's medium-term target of 4 percent.

Global cues

The higher-for-longer narrative from the US Fed acted as a cue for MPC that that will probably shape its thinking ahead. Also, recent uptick in crude prices and ongoing Russia-Ukraine war will remain as upside risks in India's inflation managment. India is a big importer of oil and global headwinds can have cascading impact on the local price movements.

What next?

All the signals from the policy statement indicate that a rate cut is not in the vicinity as the MPC is unlikely to lower the guard on the inflation front anytime soon.

In layman’s language, interest rates in India are likely to stay where they are for a while. Yet, abundant caution on the inflation dangers will be communicated clearly.

In fact, the big headache for the MPC is the real source of the current inflation spike and how much it can act upon it. By now, it’s widely admitted that the current wave of high inflation is mostly due to the supply-side constraints and not a demand-led inflation.

The hard truth is that the rate-setters have only limited tools to act against a supply-driven inflation. The ball is in the Government’s court to ease the supply bottlenecks and find ways to ramp up production.

In the previous policy reviews, some policymakers have flagged this point in their statements.

A status quo will mean nothing much for the end-consumer as banks have already factored in the move. Lending and borrowing rates are unlikely to change immediately.

But some banks, particularly large ones, could tweak the deposit rates downward as banking system liquidity eases. For equity and bond markets too, a status quo will be largely a non-event.

Next policy review is scheduled on December 6 to December 8. The RBI will likely wait for more signs of sustainable easing of retail inflation print before reversing the rate stance and even thinking about a rate stance reversal. All that is still some time away.