Just as volatile and unpredictable are stock market movements, so are RBI’s policy actions. On the face of it, we have a simple choice of either lowering rates or leaving them unchanged. Yet, every quote of RBI at different forums has the potential to create expectations, which, in turn, guide GSec yields as well as stock markets. Add to this the FM’s statements on the prerogative of RBI on interest rates, which have their own influence on expectations on the future course of interest rates. What is one to make of such a situation?
The arguments for monetary policy have always been the classic growth versus inflation debate. But this is passé today because we are no longer on this tradeoff as the belief is that low growth is not due to monetary considerations. The discussion board then moved to whether policy affects inflation. Here, too, the core inflation argument fell flat as it has not moved RBI, which still talks of generalised inflation. Logically, given that demand is low, we cannot be having excess demand forces anywhere. The debate then went on to the platform of which inflation rate we are talking of: WPI inflation or CPI inflation. In one of the earlier policies, RBI has emphasised that retail prices are more important as they affect us as consumers.
The portrait in front of us is quite clear. Growth is down or stagnant and there are few signs of it picking up in the near future as there is nothing much happening. Even if rates are lowered, actors will look to the Budget for direction and an entirely different set of issues will surface like GST, DTC, subsidy, etc. Inflation concepts present some ambivalence. WPI inflation is stable at around 7.2% while CPI inflation is high at 10.6%. This unfolds a conundrum for RBI because if it is looking at real interest rates, then it will find that when it adjusts the repo rate with WPI inflation, it is positive, while it is a big negative in case of the CPI. Therefore, RBI can toss the coin and be right either