The Reserve Bank of India (RBI) on Wednesday left key rate unchanged at 7.75% which was much against expectations of a 25 bps hike in repo rate. While it left markets surprised, the RBI governor, Raghuram Rajan, negated the surprise by leaving the door ajar for future rate hikes if the multiplicity of data points, apart from food prices, warrant so. Meanwhile, for the common person, the message is loud and clear: better get adjusted to negative returns and survive the government’s irresponsible handling of food supplies.
The rates won’t yo-yo with inflation rates but your savings sure will. The RBI no longer tom-toms the shrinking current account deficit (CAD) primarily caused by higher tariffs that lowered gold imports but increased illegal supplies. Gold smuggling has risen proportionately to the fall in CAD. But for the people of India, policies of the government and the RBI swing wildly.
The RBI is no comparison to the US Fed, though Rajan prompted one to say so during the media interaction after the policy announcement. Did he really mean it, or was he merely trying to increase his Facebook Rs likes’ and the number of followers of his tweets? What Rajan did not mention was the Fed’s meet scheduled for Thursday (India time). This is where the RBI will need to calibrate strategy on future rate hikes. The RBI’s monetary policy will surely be dictated by the US Fed’s decision on tapering of its monthly $85 billion quantitative easing (QE) or the infusion of liquidity through bond-buying — a chunk of which gets into equity markets like India.
Any tapering would lead to a flight of capital from India back to the US. Also, the demand for dollars would rise dramatically if the QE is moderate to steep. This would further devalue the rupee from the current levels of 62 per dollar to what market fears could be above 70 per dollar. So, growth could take a back seat in India.
Probably, local food supplies are not as much an agenda even though the RBI keeps mentioning that it needs to tackle inflation first rather than growth.
It is expected that the current rabi season, ending in January to mid-February, could increase supplies of cereals, wheat and coarse crops like bajra, ragi, soya, to name a few. Food inflation could come down; but then, the RBI is not sure of this. The government’s supply chain, too, comes under a scanner as in the past, too, there has been a shortage of food grains, in spite of a good crop or even surplus.
It is a fact that the RBI policy review is dictated more by other parameters than food inflation. What is commendable is that the RBI governor has succeeded in confusing the finance minister, P Chidambaram, by not hiking rates immediately but has reserved the right to do so in future. This move gives no advance warning and hence little room for political interference.
It’s ‘heads I win, tails you lose’ for the RBI.