The primary job of RBI is to maintain price stability

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) voted to leave the repo rate unchanged at 6.5% during its latest bi-monthly meeting on 6th April 2023. Financial media reports that the decision was in line with market expectations, as the central bank aims to balance growth and inflation concerns. Such reporting also shows how the RBI cares more for the borrowers than being responsible for its assigned primary role of maintaining price stability.

RBI’s primary role: RBI website proudly declares its preamble as “to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.”

RBI failed to act in time: As it is accepted the world over, central banks use the interest rate as a weapon to tame inflation and for this timely intervention from the central bank is required. In the past, when the inflation rate was rising, it is on record that the RBI has not acted in time which made the inflation go out of control and there was course correction by RBI subsequently. For the first time since the implementation of the monetary policy framework in 2016, the RBI had to submit a report to the Government on its failure to keep the retail inflation rate below six per cent for three consecutive quarters beginning January 2022. The said explanation is not in the public domain but chances are there that RBI could have taken shelter under the Covid situation prevailing at that time.

The following will amply demonstrate how the RBI has missed the bus. During the year 2020, month-wise inflation figures were on the following lines: 7.6, 6.6, 5.8, 7.2, 6.3, 6.2, 6.7, 6.7, 7.3, 7.6, 6.9 and 4.6 percentages. In 2021, month-wise inflation figures were as follows: 4.1, 5.0, 5.5, 4.2, 6.3, 6.3, 5.6, 5.3, 4.3, 4.5, 4.9 and 5.7 percentages. But what RBI was doing during this period? The RBI was going to reduce the Repo rate from 2018 for nearly two years. Only on 4th May 2022, it reversed the trend by increasing the repo rate just by 0.40 per cent.

 Now let us see the inflation rate during the last 14 months to know whether the RBI has got a grip on inflation. The inflation rates are as follows from Jan 2022 to Feb 2023:6.00, 6.10, 7.00, 7.80, 7.00, 7.00, 6.70, 7.00, 7.40, 6.80, 5.90, 5.70, 6.70, 6.50 and 6.40 percentages.

RBI has been mandated to maintain an inflation rate of 4 per cent with a plus or minus 2 per cent variation. The cushion of two per cent variation has been provided as sometimes with various sudden inflows and outflows, the RBI may need time to act and bring the inflation within limits. During 2022, for nine months the upper boundary of inflation was breached and even the annual inflation rate was more than the upper boundary level.  One fails to understand the logic of RBI’s not raising the repo rate to contain inflation. Other factors ignored

Since the last Repo revision bank depositors have started receiving some positive interest after adjusting for inflation as the banks have revised deposit rates upward. The present decision to hold the rates will definitely increase inflation and once again the depositors will be penalized. 

OPEC and its allies, including Russia, agreed recently to widen crude oil production cuts to 3.66 million barrels per day (bpd) or 3.7% of global demand. This is going to increase the price of crude oil. Our import bill will go up. There will be pressure on the Rupee against the dollar. The news that the Indian rupee declined against the U.S. dollar after the RBI unexpectedly kept the repo rate unchanged confirms this view. The rupee declined to an intraday low of 82.06 per U.S. dollar versus 81.88 before the RBI policy announcement. All these will contribute to added inflation.

The banking system in India is robust and there is no need to make a pause in repo increase to tame inflation. It is felt that the RBI is giving more importance to growth. It seems that the RBI has not learnt its lesson from its failure to contain inflation in the earlier years.

(The writer is a retired banker)