RBI must keep playing it safe
Hindustan TimesThe last three years have shown why fiscal and monetary policy have to remain conservative and nimble, and why policymakers themselves have to be resolute. Last week, the monetary policy committee of the Reserve Bank of India raised the interest rate by 0.35 percentage points to 6.25% and, according to its policy statement, “decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.” On Monday, data showed retail inflation in November cooling to 5.88%, the first time this calendar year that it came in under 6%, the upper band of RBI’s tolerance level, even as industrial output for October contracted by 4%, with manufacturing contracting 5.6%, and consumer-facing categories contracting by 13-15%. But a closer reading shows core inflation remains high, with food prices largely being responsible for the sharp dip in November inflation, both retail and wholesale. And as RBI governor Shaktikanta Das said while presenting the policy statement, “In a hostile international environment, the Indian economy remains resilient, drawing strength from its macroeconomic fundamentals …”. That, and the bank’s policy statement, which spoke of “firm” core inflation, presaged another interest rate increase, albeit a small one, in February – and Monday’s data has not done enough to change the outlook.