Opinion I After rate hike, RBI gears up for period of uncertainty

Ravi Krishnan Moneycontrol News

A rate hike was widely expected. The monetary policy committee of the Reserve Bank of India did not disappoint on that count because many of the risks it had flagged earlier have materialised. But the tone of the statement is less hawkish than previous ones. It is seemingly at odds with both the rate hike, which was the second one in three months and projections for inflation for the next three quarters.

The rate-setting panel noted that risks to inflation are “evenly balanced” now. Earlier, it had said risks to inflation were tilted to the upside. RBI also retained a neutral stance for monetary policy which gives it the flexibility to cut or hike rates depending on incoming data. This is despite the fact that consumer price inflation has averaged above 4 percent for eight months in a row. The central bank itself is projecting 4.8 percent inflation in the second half of this fiscal and 5 percent for the first quarter of fiscal 2019-20.

The reason for this seeming dichotomy is because the central bank is facing great uncertainty on several fronts. Governor Urjit Patel said the monetary policy committee wants to keep its options open in light of volatile inflation readings expected. There are some reasons for the switch in tone. Crude oil prices have come down from recent highs. Good monsoon rains are supposed to help rein in food inflation. The recent cut in the goods and taxes rates for several products could moderate inflation.

In the next few months, it is widely expected that inflation readings will come down because of the statistical base effect. But a flexible inflation targeting mandate means the central bank and its rate-setting committee have to look at inflation dynamics in the medium term. Patel reiterated the RBI wanted to maintain consumer price inflation at 4 percent on a durable basis.