A-committeeing we will go!
The job of the central bank is to worry,’ Sanjay Malhotra told this paper in late-February. In hindsight, that comment, made just days before the outbreak of war in West Asia on February 28, seems prescient. With the war showing no signs of ending, and crude prices staying above $100 a barrel due to closure of the Strait of Hormuz, the RBI governor has enough and more to worry about.
As does RBI’s monetary policy committee (MPC) when it meets over the next three days from today. It should have been the best of times. Instead, it’s close to the worst. Rewind to MPC’s last meeting in early February. Things couldn’t have looked better. Growth was strong — NSO had just revised its growth estimate for the year upwards, and inflation was within the range, even if it was a tad higher after CPI had been recast to its new 2024 base.
Also Read | RBI expected to hold rates steady in first monetary policy since West Asia conflict: SBI Report
MPC’s rose-tinted view of macros couldn’t have soured more. The next set of GDP growth numbers is due only in end-May. But signs of a slowdown are unmistakable. Meanwhile, prices — where monthly data releases give us a more up-to-date handle on our macroeconomic fundamentals — are beginning to show impact of the war. Retail inflation in February, the last data point for MPC, has risen to a 10-mth high of 3.21% y-o-y, up from 2.74% in January.
According to the monthly economic report for March, authored by chief economic adviser V Anantha Nageswaran, impact of the conflict on India will be felt through four channels: supply disruptions to oil, gas, fertilisers and exports; higher import prices; increased logistics costs; and a possible decline in remittances by Indians in Gulf countries. In his view, ‘the combined impact across the four channels on growth, inflation, the fiscal balance, and external balances is likely to be significant’.
Also Read |Stocks braced for volatility as RBI policy, West Asia conflict take centre stage, say analysts
What Nageswaran failed to add, perhaps inadvertently, is that monetary policy, too, is bound to be impacted. In less than 40 days, the war has upended the global economy. Though retail consumers have been shielded somewhat from the direct impact of the oil price hike — thanks to GoI cutting excise duties on petrol and diesel — retail prices on commodities where crude and its byproducts are inputs have started rising.
According to IEA, the war is creating ‘the largest supply disruption in the history of the global oil market’. But it’s not only oil. Supply chains for a host of goods, from metals to fertiliser to components for computer chips, have been disrupted. Meanwhile, with rupee weakening by the day, despite RBI’s strong-armed measures to prevent too rapid a depreciation, it’s only a matter of days before prices rise across the board. Some economists have warned of a 1970s style stagflation — a combination of rising prices and falling growth. Falling growth calls for lower interest rates. But rising inflation calls for higher rates. How is the MPC to square the circle? Answer: by sitting on the sidelines for this meeting.
Remember, its mandate is limited to a single policy tool: repo rate. It has no say even on liquidity. But the situation today calls for much more than mere rate action.
The ball is now firmly in GoI’s and RBI’s court. The former will have to come to the rescue of those most affected by lower growth and higher prices. The central bank will have to resort to administrative measures to hold rupee depreciation in check. For now, it has capped open positions that banks can hold in onshore currency markets at $100 mn. It has also banned authorised dealers from offering non-deliverable derivative contracts involving rupee, restricting rebooking of cancelled contracts and related-party transactions.
But these can only act as a temporary salve. It may have to do more. In the words of former European Central Bank president Mario Draghi, it will have to do whatever it takes to restore a semblance of order in the forex market.
Ironically, just when the flexible inflation targeting regime (FITR) has been given a fresh lease of life for another 5 yrs, MPC has, perhaps for the first time, been made redundant. Well, not entirely. After the February MPC meet, Malhotra had explained its silence on growth and inflation projections, saying, ‘In view of the forthcoming revision in the base year and methodology, we will be giving the full-year projections of growth and inflation in the next policy.… We are still analysing the impact of the changes. Our analysis will also account for the impact of changes in tariffs.’
The April MPC meet can no longer dodge that question. Even as it signals a no-show on rates, it will have to bring its considerable expertise to bear on the impact of not just higher tariffs but also the war on the future trajectory of the economy. An unenviable task, by any reckoning.
As does RBI’s monetary policy committee (MPC) when it meets over the next three days from today. It should have been the best of times. Instead, it’s close to the worst. Rewind to MPC’s last meeting in early February. Things couldn’t have looked better. Growth was strong — NSO had just revised its growth estimate for the year upwards, and inflation was within the range, even if it was a tad higher after CPI had been recast to its new 2024 base.
Also Read | RBI expected to hold rates steady in first monetary policy since West Asia conflict: SBI Report
MPC’s rose-tinted view of macros couldn’t have soured more. The next set of GDP growth numbers is due only in end-May. But signs of a slowdown are unmistakable. Meanwhile, prices — where monthly data releases give us a more up-to-date handle on our macroeconomic fundamentals — are beginning to show impact of the war. Retail inflation in February, the last data point for MPC, has risen to a 10-mth high of 3.21% y-o-y, up from 2.74% in January.
According to the monthly economic report for March, authored by chief economic adviser V Anantha Nageswaran, impact of the conflict on India will be felt through four channels: supply disruptions to oil, gas, fertilisers and exports; higher import prices; increased logistics costs; and a possible decline in remittances by Indians in Gulf countries. In his view, ‘the combined impact across the four channels on growth, inflation, the fiscal balance, and external balances is likely to be significant’.
Also Read |Stocks braced for volatility as RBI policy, West Asia conflict take centre stage, say analysts
What Nageswaran failed to add, perhaps inadvertently, is that monetary policy, too, is bound to be impacted. In less than 40 days, the war has upended the global economy. Though retail consumers have been shielded somewhat from the direct impact of the oil price hike — thanks to GoI cutting excise duties on petrol and diesel — retail prices on commodities where crude and its byproducts are inputs have started rising.
According to IEA, the war is creating ‘the largest supply disruption in the history of the global oil market’. But it’s not only oil. Supply chains for a host of goods, from metals to fertiliser to components for computer chips, have been disrupted. Meanwhile, with rupee weakening by the day, despite RBI’s strong-armed measures to prevent too rapid a depreciation, it’s only a matter of days before prices rise across the board. Some economists have warned of a 1970s style stagflation — a combination of rising prices and falling growth. Falling growth calls for lower interest rates. But rising inflation calls for higher rates. How is the MPC to square the circle? Answer: by sitting on the sidelines for this meeting.
Remember, its mandate is limited to a single policy tool: repo rate. It has no say even on liquidity. But the situation today calls for much more than mere rate action.
The ball is now firmly in GoI’s and RBI’s court. The former will have to come to the rescue of those most affected by lower growth and higher prices. The central bank will have to resort to administrative measures to hold rupee depreciation in check. For now, it has capped open positions that banks can hold in onshore currency markets at $100 mn. It has also banned authorised dealers from offering non-deliverable derivative contracts involving rupee, restricting rebooking of cancelled contracts and related-party transactions.
But these can only act as a temporary salve. It may have to do more. In the words of former European Central Bank president Mario Draghi, it will have to do whatever it takes to restore a semblance of order in the forex market.
Ironically, just when the flexible inflation targeting regime (FITR) has been given a fresh lease of life for another 5 yrs, MPC has, perhaps for the first time, been made redundant. Well, not entirely. After the February MPC meet, Malhotra had explained its silence on growth and inflation projections, saying, ‘In view of the forthcoming revision in the base year and methodology, we will be giving the full-year projections of growth and inflation in the next policy.… We are still analysing the impact of the changes. Our analysis will also account for the impact of changes in tariffs.’
The April MPC meet can no longer dodge that question. Even as it signals a no-show on rates, it will have to bring its considerable expertise to bear on the impact of not just higher tariffs but also the war on the future trajectory of the economy. An unenviable task, by any reckoning.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
Mythili Bhusnurmath
ET Now Consulting Editor