Business News›Opinion›ET View›ET View: Rate hike deferred, aiming for compression of the Current Account Deficit via a weaker rupee?
ET View: Rate hike deferred, aiming for compression of the Current Account Deficit via a weaker rupee?
The MPC’s mandate is to target inflation, all other macroeconomic variables being taken into account only through their impact on inflation.
By deciding to hold its policy rates for the time being, even while changing the stance of monetary policy from neutral to hawkish, the Monetary Policy Committee has signalled that it is okay with the rupee declining further. The forex market has fulfilled its wishes immediately, the rupee sliding past the Rs 74 to the dollar mark soon after the MPC decision to hold the repo rate unchanged at 6.5% was announced.
The MPC’s mandate is to target inflation, all other macroeconomic variables being taken into account only through their impact on inflation. The MPC expects inflation to be more moderate than its estimate the last time it met in August. The cut in excise duty on fuels is one factor, bountiful harvests are another, the dissipating effects of the government’s increase in house rent allowance is yet another. Growth for the year is estimated to be 7.4%, unchanged from the August estimate.
When the US Fed has announced yet another interest rate hike and the strengthened dollar and volatile trade and currency flows pose the risk of the rupee coming under pressure yet again, the MPC would raise policy rates a tad — this was the expectation of the majority of market observers. The debate was, would the rate hike be 25 basis points or 50.
By refusing to hike policy rates now, but by standing ready to tighten money supply, if it feels the need to do that, the RBI has set the stage for future tightening. Perhaps, it calculates that the economy should be allowed to consolidate the growth impulse it has begun to experience after the demonetisation funk, and let robust growth counter the vicissitudes of currency flows and higher crude prices. Non-crude commodity prices have softened and that promises to help rein inflation in. Incidentally, the ever-rising import of coal that the MPC takes note of, in spite of India possessing one of the world’s largest reserves of coal, speaks of the failure of government policy on coal so far. The captive mines auctioned off with much fanfare have failed to produce and the government has given up on merchant mining, leaving the country dependent for coal supplies on the notorious efficiency of the state monopoly on coal. What should one expect but a wider current account deficit and a weaker rupee?