A valid pause: on RBI holding rates
While holding rates, the RBI has wisely stuck to its policy stance of ‘calibrated tightening’
The Reserve Bank of India’s
decision to leave interest rates unchanged, given easing inflation and the
slowdown in economic momentum, was both expected and reasonable. In fact, the
RBI was prompted to sharply lower its projection for price gains after an
unexpected softening in food inflation and a collapse in oil prices in a surprisingly
short span of time — the price of India’s crude basket tumbled almost 30% to
below $60 by end-November from $85 in early October. The monetary policy
committee (MPC) now estimates retail inflation in the second half of the fiscal
year to slow to 2.7%-3.2%, at least 120 basis points lower than its October
forecast of 3.9%-4.5%. And it foresees the softness in prices enduring through
the April-September half of next year, when headline inflation is projected to
hover around its medium-term target of 4% and register in a 3.8%-4.2% range.
The MPC’s decision to stand pat on rates must also have been bolstered by the
findings in the RBI’s November survey of households’ inflation expectations:
the outlook for price gains, three months ahead, softened by 40 basis points
from September. On growth, the monetary authority has largely stuck with its
prognosis from October, while flagging both external and domestic risks to
momentum as well as the likely sources of tailwinds. Among the positives cited,
beyond a likely boost to consumption demand and corporate earnings from softer
fuel costs, are two key data points from the RBI’s own surveys. Capacity
utilisation rose to 76.1% in Q2, higher than the long-term average of 74.9%.
Also, industrial firms reported an improvement in the demand outlook for Q4.
Still, the forecast for full-year GDP growth has been retained at 7.4%, on the
back of an expected 7.2%-7.3% second-half expansion, with the risks weighted to
the downside.
Interestingly, and justifiably so, the RBI has
opted to keep the powder dry by sticking to its policy stance of ‘calibrated
tightening’. Given that its primary remit is to achieve and preserve price
stability, the central bank is wary of the uncertainties that
cloud the inflation horizon. For one, with the prices of several food items at
“unusually low levels”, the RBI reckons there is the clear and present danger
of a sudden reversal, especially in prices of volatile perishable items. Also,
the medium-term outlook for crude oil is still quite hazy, with the possibility
of a flare-up in geopolitical tensions and any decision by OPEC both likely to
impact supplies. Buttressing this reasoning, households’ one-year-ahead
inflation expectations remain elevated and unchanged from September. Most significantly,
the central bank has once again raised a cautionary signal to governments, both
at the Centre and in the States. Fiscal slippages risk impacting the inflation
outlook, heightening market volatility and crowding out private investment.
Instead, this may be an opportune time to bolster macroeconomic fundamentals
through fiscal prudence.
01. Stick to
(phrasal verb) – adhere to/abide by, keep, hold to.
02. Calibrated
(adjective) – carefully assessed, carefully regulated, carefully adjusted.
03. Inflation
(noun) – increase of price level of goods & services & vice versa
decrease of currency value.
04. Slowdown
(noun) – economic decline, recession, slump/depression.
05. Projection
(noun) – expectation, prognosis, prediction.
06. Indian crude basket
(noun) – Indian Basket (IB); It is weighted average of Dubai and Oman (sour)
and the Brent Crude (sweet) crude oil prices. It is used as an indicator of the
price of crude imports in India.
07. Tumble
(verb) – fall sharply, decrease, decline/slump.
08. Foresee
(verb) – anticipate, predict, expect.
09. Headline inflation
(noun) – it is a measure of the total inflation within an economy, including
commodities such as food and energy prices (e.g., oil and gas). core inflation
(noun) – it is a measure of the total inflation within an economy, excluding
commodities such as food and energy prices (which change frequently).
10. Hover
(verb) – remain at a level.
11. Stand pat (phrase)
– stick firmly to a decision made.
12. Bolster (verb)
– strengthen, support, reinforce/buttress.
13. Flag (verb)
– indicate, identify, point out.
14. Tailwinds
(noun) – (in business) it describes a situation or condition that will move
growth, revenues, or profits higher.
15. Headwinds (noun)
– (in business) situations or conditions that make growth harder/difficult.
16. Be weighted (verb) – be planned/arranged.
17. Keep (the powder) dry (phrase)
– be prepared for an emergency.
18. Remit (noun)
– task/duty, responsibility, ambit.
19. Wary
(adjective) – cautious, careful, circumspect.
20 Cloud
(verb) – confuse, muddle, make unclear.
21. Horizon (noun)
– outlook, purview, perspective.
22. Reckon (verb)
– think, consider; suppose.
23. Volatile (adjective)
– unpredictable, changeable, variable/inconstant.
24. Perishable (adjective)
– easily spoilt, biodegradable; relating to items likely to decay quickly,
especially foods.
25. Hazy (adjective)
– indistinct, unclear, ill-defined.
26. Flare-up
(noun) – (a sudden) eruption, outburst, outbreak.
27. Fiscal slippage
(noun) – the missing fiscal targets in the country’s budget.
28. Heighten
(verb) – increase, raise; aggravate/worsen.
29. Crowd out
(phrasal verb) – oust, overthrow, remove.
30. Opportune
(adjective) – favorable, advantageous, right.
31. Macroeconomic
(adjective) – relating to the branch of economics concerned with large-scale
factors (interest rates/national productivity).
32. Fiscal prudence
(noun) – cautiousness, carefulness, judgement on fiscal decisions like
borrowing, and spending, and managing the fiscal targets.
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