India’s inflation, which is measured by the Consumer Price Index (CPI), has stayed above the Reserve Bank of India (RBI)’s upper tolerance limit of 6% for three months running. The central bank’s monetary policy committee decided to hold benchmark interest rates earlier this month, choosing to remain accommodative “while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”. The sole ___________________of the RBI is to look into price stability.

Having said that, the context is important. Inflation is mounting. There is geopolitical uncertainty. The war in Ukraine led to supply-chain disruptions. Consignments are getting delayed. So, there has been a significant rise in crude oil price. Thus, maneuvering with repo rate adjustments to contain inflation may not work. The reverse repo rate itself is likely getting redundant, because the RBI has introduced a new tool — the standing deposit facility rate (SDF) as the floor in the Liquidity Adjustment Facility (LAF) at 3.75% — to absorb excess liquidity. That’s a smart move, to work with the monetary policy corridor but leaving the rates untouched.

There are areas where it feels like the RBI was behind the curve on inflation control. One, in the February policy, the RBI said it expected FY23 CPI inflation to be 4.5%. That didn’t seem credible. It has revised the estimate to 5.7%. Two, for long the RBI insisted that the 10-year government bond yield was a public good that had to be kept low. In FY21, both the central and State governments had a record borrowing program. The FY21 weighted average government borrowing rate was a record low of just 5.8%. So, the returns for savers were brought down dramatically.

Our household inflation expectations are at 11%. Average deposit rates across all banks are at just 5%. The resultant asset price inflation is also increasing inequality — the top 15% are doing very well and consuming luxury products, even as the bottom 40% are struggling. But to be fair to the RBI, it’s not been an easy time. And to give credit, the RBI stopped its government bond purchases in October. Likewise, our money market rates have already gone up quite a bit. We have very high fiscal deficit and high debt numbers. But from a position of strength, the finance minister articulated that her high fiscal deficit can be validated through enhancing investment — through ‘crowding in’ private corporate investment. The real GDP for FY22 is pretty much the same as it was two years ago before the pandemic. Effectively, two years have gone by with zero real growth. In the last two years, inflation has been 6% compounded annual; high inflation and zero growth are a disaster. The RBI’s growth estimate of 7.2% for the current fiscal is also at risk.

How does the RBI manage to work with monitory policy corridor without tempering its policy rates?