An MPC rate cut could've waited for a clearer outlook

Prudence and a fast-evolving scene had made a clear case for it to mark time while letting RBI handle liquidity

- MYTHILI BHUSNURMATH

Personalities matter. Even in the otherwise arcane world of central banks, where rules have long displaced discretion and legislated mandates are the order of the day. How else can one explain the difference in policy outcomes at the February 2025 meeting of the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) vis-à-vis its earlier meeting in December 2024? If not in terms of the difference in perception of the men at the helm of RBI then and now?

In December, the MPC opted to play safe. It maintained a status quo on rates (by a 4:2 majority) and stance on the grounds that the beast of inflation, though slain, had not been destroyed, and growth, though slowing, remains resilient. Two months later, the MPC, with a new governor at the helm, seems to have pivoted. Why?

The rules are clear. After the shift to 'flexible inflation targeting' in 2016, RBI's mandate has been to keep retail inflation within a 2-6% band while "keeping in mind the objective of growth." No quibbles on that score. But RBI Governor Sanjay Malhotra in his maiden monetary policy statement seems to have focused on the first word, 'flexible.' His leitmotif: to make use of the "flexibility embedded in the framework while responding to the evolving growth-inflation dynamics." His predecessor Shaktikanta Das, in contrast, preferred to focus on the last word, 'target,' stressing over and over that he saw the target as 4% on a durable basis. And that made all the difference.