The first monetary policy under Shaktikanta Das ticks all the
right boxes (Live Mint)
Mains Paper 4: Economy
Prelims level: MPC
Mains level: MPC highlights
- The monetary policy committee (MPC), which sets the policy or repo
rate, has to strike the right balance between assessing recent inflation
trends and forecasting the future.
- Its mandate is to make sure that average inflation is around 4%,
though it technically does have a leeway of two percentage points on either
- This time, the MPC faced a rather unique problem for an economy
used to somewhat chronic high inflation inflation prints have been a little
too low for its comfort in the past few months.
- It might surprise some that extremely low inflation has its own
set of problems.
- For one, it breeds expectations of a further fall in inflation.
- Consumers tend to hold back their purchases, while producers lose
the incentive to manufacture, leading to a deflationary spiral.
- For India, the last couple of consumer inflation data prints have
been dangerously close to the lower end of the target band of 2%.
- The decision to cut the policy rate today ticks all the proverbial
boxes. First, it recognizes that recent inflation has left enough room for
interest rates to fall.
- Projections peg consumer price inflation to be well below the 4%
mark till the third quarter of 2019-20.
- Thus, by cutting rates today it is unlikely to face the immediate
whiplash of a spurt in prices.
- It does not fret excessively about the so-called core inflation
that removes volatile components, such as food and fuel, from the consumer’s
- This component has incidentally been considerably higher than the
To reiterate a couple of things
- First, that monetary policy works both ways, hiking rates when
inflation builds up and lowering it when inflation eases. This should dispel
the notion that the RBI is only in the business of hiking rates and chooses
to look away when prices soften. This symmetry in rate action was important
to establish the credibility of this relatively new policy model.
- Second, it hammers home the fact that the RBI has chosen to target
the headline CPI, and not one of its components such as core inflation. Some
economists cite high core inflation to make a case for holding the policy
rate steady. This is not to say that elevated core inflation might not drive
headline inflation up in future. However, the RBI’s projections would have
taken this interplay into account and the pressure from ‘core is not
sufficient to bust the 4% over the RBI’s forecast horizon’.
How does it differ from previous policies?
- The growth re-enters the central bank’s vocabulary as something to
be cherished and not to be viewed as something that raises the risk of
- The assumption that monetary policy had to necessarily move in the
opposite direction as fiscal policy, which underpinned many of the earlier
policies, is not strong now. Even with a degree of fiscal expansion, the RBI
might be willing to cut rates further if inflation remains within its
- Today’s monetary policy jettisons the ritual of a change in
‘stance’ first followed by a possible cut in the actual rate. In a volatile
world like ours, monetary policy cannot afford the languor of a Japanese tea
- It is unfortunate that the cynics will find reason to question
governor Shaktikanta Das’s intentions both because of the alleged draft on
the RBI’s autonomy and his background as a bureaucrat who worked with the
- Thus, some, including those in foreign financial press, see the
rate cut as a growth booster that might help the government’s prospects in
the impending elections.
- Conspiracy theories are dangerous if taken seriously. The hard
numbers, both past and projected, made an unqualified case for a rate cut.
That’s all there is to it.
Q.1) Which among the following countries became the first country to issue
"Blue Bond" for the development of Marine Sector?
Q.1) The first monetary policy under Shaktikanta Das ticks all the right boxes.