Signs of Continuity Are All Pervasive in Urjit Patel’s Monetary Policy Review

The policy statement put out by the RBI is consistent with an accommodative stance of monetary policy and has largely unexceptional goals.

RBI governor Urjit Patel. Credit: PTI

RBI governor Urjit Patel. Credit: PTI

The true significance of the fourth bi-monthly monetary policy statement for 2016-17 lies less in it being the first by the recently constituted monetary policy committee (MPC) with a new governor, but in the fact that it stresses continuity. In fact, those uninitiated in the ways of the government and the RBI might discern a deep sense of deja vu. The fact that the MPC has ushered a fundamental change in the formulation and communication of an important policy might be easily lost sight of.

Signs of continuity are all pervasive. The reduction of the policy repo rate by 0.25 percentage points to 6.25 and the corresponding realignment of the reverse repo ,the marginal standing facility rare and the bank rate were widely expected. Market expectations were widely met and interestingly have had nothing to do with the change at the RBI. The new governor Urjit Patel is widely perceived to have been brought in by the government keen for the RBI to adopt a softer stance on inflation control in contrast to the hawkish Raghuram Rajan. That there is no substance in such beliefs has been amply proved by the form and content of the monetary policy statement.

As the policy statement puts it, the decision of the MPC is consistent with an accommodative stance of monetary policy .The objective is to peg CPI (consumer price index) inflation at 5 percent by the fourth quarter of the current year (2016-17). The medium-term target remains at 4 per cent within a band of plus or minus 2 percent while supporting growth.

Those were unexceptional goals and could well have been reiterated by any policy statement. An assessment of the economy both global and domestic is on predictable lines. Global growth has been slowing more than anticipated through 2016 so far with weak investment and trade damaging aggregate demand. Risks have arisen from the festering banking crisis in Europe ,the re-balancing of debt-fuelled growth by China and the unexpected Brexit vote. Protectionism is on the rise and altogether there is less faith in monetary policy as a potential saviour of individual  economies.

On the domestic front, the outlook for agriculture has brightened after a satisfactory south west monsoon. Food production during the current year is expected to be at an all-time high. Industrial production on the other hand has been sluggish The government has initiated a  number of steps to boost industrial output-unclogging investment in stalled infra projects, increased investment in roads; railways and inland waterways being just two of them.The seventh pay commission award will boost consumer spending and is a major positive,

Retail inflation moved up sharply on the back of food inflation. However the tempo of rising food prices has been partially reversed. Global oil prices remain soft and have partially cushioned a higher current account deficit. However commodity prices at the global level have been on the lower side and this has stressed India’s exports. The RBI has tried to ensure comfortable the system although the policy statement does not  specifically reiterate that as its objective.

The momentum of growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand as well as by the stimulus to urban spending flowing from the pay commission award. The MPC’’s stress on continuity is welcome and even more relevantly inevitable.The fact that six members unanimously voted in favour of the monetary policy decision augurs well for predictable policies in future.

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