At the conclusion of its second bi-monthly meeting for the current financial year on June 7, the MPC of RBI kept the policy rate unchanged for the eighth time in a row at 6.5 per cent. Similarly, there was no alteration in the stance of the policy. These outcomes were almost universally anticipated. There was a broad-based rally in the equity market on June 7, on the back of renewed optimism regarding stability within the coalition government at the Centre, on the one hand, and the RBI’s upward revision of its growth projection for FY25 to 7.2 per cent from 7 per cent previously. The prices of government securities rose a small bit.
Inflation, growth prospects
The RBI feels that it is on the right track in bringing down the CPI inflation: since February 2024, there was a further decline in the headline number from 5.1 per cent to 4.8 per cent in April 2024. However, food inflation continues to remain elevated due to higher prices of vegetables, pulses, cereals, and spices. Fall in crude oil price has happened apace since the first week of April 2024. A shift towards higher production by major OPEC+ countries is now underway, as a result of which the likelihood of crude price crossing $100 per barrel in the near future has diminished. Recent cuts in LPG and ATF prices in India reflect these developments. Core inflation eased further to 3.2 per cent in April, the lowest in the current CPI series.
The projection for CPI inflation for 2024-25 has been kept unchanged at 4.5 per cent. As per the latest estimate, real GDP growth for 2023-24 has been placed at 8.2 per cent — higher than the 7.6 per cent projected at the last MPC meeting in April. The projection for FY25 has now been raised from 7 per cent to 7.2 per cent.
The RBI believes that with growth holding firm in India, the monetary policy has greater elbowroom than before to pursue price stability to ensure that inflation aligns with the target of 4 per cent on a durable basis. In other words, in the foreseeable future, the RBI will focus its attention on price stability to effectively anchor inflation expectations and thus provide the required foundation for sustained growth over a period of time. This would mean that unless growth falters in a big way, the RBI would keep the policy rate unchanged in the remainder of FY25.
The RBI is certainly not guided by any principle to follow the Federal Reserve as regards its monetary policy formulation, in general, and more specifically for the commencement of its next easing cycle.
The Fed funds rate at its current range of 5.25-5.50 per cent is a 23-year high. The financial markets in India and elsewhere follow closely the developments there to assess the timing and quantum of change in the policy rate in future. Among other factors, the assessment of likely Fed action impacts movements in G-Sec prices and dollar/rupee forward premia.
Aspirational goals
Central banks are generally parsimonious with their words when it comes to making public their in-house agenda or plans for the future in respect of their areas of responsibilities. The articulation — cryptic though — of the RBI’s aspirational goals in the run-up to 2034 — its centenary year — in this policy is certainly a welcome development. As the RBI has hastened to point out that the agenda document is not a static one and, hence, would be updated, going forward, one would expect to see some more clarity and precision in certain items such as its plan to address ‘Balancing price stability and economic growth from an Emerging Market Economy (EME) perspective’.
One wonders if there is any prima facie evidence to suggest that balancing of inflation and growth in monetary management is a different ball-game in countries like India.
Also, one would expect that the proposed review exercise will not result in any dilution of the current inflation-targeting framework. If anything, the 4+/-2 per cent target structure needs a relook, since, in the light of the outcome of the recently held parliamentary election, it is amply clear that the pain threshold for inflation in India has declined.
The aspiration to make RBI’s supervision a global model over the next 10 years seems to be in consonance with the likely growth in the country’s economic heft and influence during that period. But how this intent is translated into an outcome-based ambition is the real issue. Frankly, the RBI will have to traverse a long distance, working hard all the way to upgrade its supervisory capabilities and standard to levels close to global benchmarks in this regard. The adage that ‘the Indian banking system is highly regulated but poorly supervised’ is still largely true.
To be sure, there has been significant improvement in the financial position and governance arrangements of banks, especially of public sector banks over the last 10 years or so. This could be largely attributed to a perceptible drop in political and bureaucratic interference in their decision-making. If the RBI were to realise its aspiration, the first and foremost requirement would be to have within its fold a critical mass of highly-skilled and well-trained supervisors and off-site and on-site examiners and a strong professionally competent leadership. Identification of personnel for this purpose needs to be based on a set of objective criteria and should also be process-driven. This is easier said than done, given the fact that there were few takers within the RBI for the move to create a separate cadre of supervisors and examiners a few years ago.
Publishing a risk management framework for managing climate-related financial risks in regulated entities would also be a formidable task as well as an excellent opportunity for advancing the cause of sustainable finance in the country. However, right now, significant knowledge and skill gaps in this regard exist both in the regulator and the regulated entities. All available policy options to bridge these gaps need to be carefully evaluated and actionable strategies should be formulated and made public as early as possible.
Another aspirational goal for the RBI could be to transform and upgrade itself as a model for central banks as regards governance, policies, procedure and risk management in respect of its position as a financial institution. In terms of the size of its balance sheet, the RBI is larger than the biggest bank in the country by several orders of magnitude. And it should lead by example: the RBI should disclose, in sufficient detail, i.e., more than the routine narrations in its annual reports, its own operational risk management framework, with particular emphasis on information technology and communication risk and business continuity plan.
The writer is a former central banker and a consultant to the IMF. Through The Billion Press
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