No One’s Poodle

ON FEBRUARY 8TH, the Reserve Bank of India (RBI) held back on reducing policy rates. Markets and the Government would have liked interest rates to fall and the former reacted badly, with bond yields rising sharply in response to the decision. If the economic signals emanating from the RBI are important, so is the ‘political’ message: the six-member Monetary Policy Committee (MPC) unanimously agreed not to cut rates.

There is plenty of evidence that prices have cooled in recent months. There are indications that this is likely to be the case in the months ahead. The RBI has also released the results of its December-ending quarter survey of inflation expectations of households, a closely watched index that shows what people at large expect of price levels. The index has seen a sharp fall, a clear indicator that prices are expected to remain subdued in the near term.

Yet, the central bank chose not to reduce rates. In its announcement, the RBI said that it was committed to bring inflation close to 4 per cent ‘on a durable basis’ and this requires a further reduction in price-rise expectations. Hence, to use economic jargon, it was changing the monetary policy stance from ‘accommodative’ to ‘neutral’. In plain language: don’t expect lending rates to come down.

There is a sharp message here for the critics of RBI Governor Urjit Patel. In recent months, he has been criticised unfairly for being ‘subservient’ to the Central Government. In RBI’s history, there have been very few occasions when the Governor has ‘bent’ to the Centre’s wishes. Until last year, the interest rate decision rested with the Governor. Now the MPC takes that call. The panel has three government nominees. If the Government indeed has control over the central bank, the decision of February 8th should have been different, or at least it should have been contested. There was no sign of that. As mentioned above, the MPC acted in unison. Even if one disagrees with the RBI decision, there can be no doubt that it was made on the basis of economic criteria.

In a democracy, one is free to air one’s views, but to keep repeating ad hominem that Patel is somehow beholden to the Government strains credibility. Such assertions do a disservice to the RBI, an institution that has often acted against the ‘wishes’ of governments but has always worked in the interests of the Indian economy.

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