It’s a no-brainer that RBI Governor Urjit Patel is an unusual economist. But last Friday, it was the central bank’s esteemed Monetary Policy Committee (MPC) that seemed self-righteous. It’s indeed a Groundhog Year, and hopes were high that the MPC will lean against the wind to hike repo rate by 25 bps.
But the assembled econo-brains didn’t think it necessary, leaving the markets and rupee in utter shock and horror. Economic commentators turned furious drawing parallels to emerging markets like Indonesia, which lifted rates five times to counter the currency fall. But India isn’t Indonesia, and hence Patel isn’t allowing rupee to dictate his policy discourse.
If you juxtapose logic to reasoning, the MPC’s decision appears valid. Agreed, India is dependant on dollar inflows, but unlike others, foreign holding in debt securities is just 4.2 per cent as against say Indonesia’s 37.6 per cent. Also, the MPC’s sole, legislative mandate is inflation targeting and it will be concerned about currency, or crude, only to the extent it feeds into inflation.
This, some say, chisels away RBI’s ‘full-service’ role, but it’s important to distinguish that the MPC is an independent body and the designated inflation-nutter. It doesn’t necessarily shrink the RBI’s role from managing broader financial stability.
Then what’s the fuss all about? The evil twins—crude prices and capital outflows —are wreaking havoc on India’s Balance of Payments. In ordinary course, either policy rates, or import duties or both are spiked. But the government’s recent duty hikes appear decorative, and with the RBI not budging on rates, that job is now left to rupee.
Depreciating rupee limits consumption, but is also counterproductive, which is when the RBI steps in. However, if the costs of defending currency doesn’t exceed benefits, like right now, and as inflation is well-behaved, the MPC perhaps saw no reason to mimic other central bankers. The RBI’s inflexibility to raise rates may be its USP now, but Patel should know well that it doesn’t always connote strength.