MONETARY POLICY: AVOID EMOTIVE CHOICES AND STAY AGILE

The weakness in GDP data is now bound to intensify the debate on monetary policy

- Vivek Kumar

The RBI kickstarted its post-covid normalization of monetary policy in April 2022. Since then, India's monetary policy trajectory had been moving forward without any humps amid well-aligned expectation of financial market participants, corporates, and the government. With India's GDP growth averaging at a healthy 7.6% during FY23 and FY24, the strict pursuit of inflation management by the central bank faced no friction from key stakeholders in the economy.

However, in recent months alternate forms of inflation management are now being publicly debated. Willy-nilly, the conclusion in such debates appears to be veering towards the notion that India's Monetary Policy Committee is maintaining its policy rate higher than necessary to tame CPI inflation, which: (i) suffers from outdated statistical representation of food basket, (ii) does not reflect broad-based price pressures as select food items are playing havoc, and (iii) over the last few quarters has been moving in divergence with the underlying subdued core inflation trend, that is generally considered to be a better proxy for demand side pressures.

Recently, the finance minister and the commerce minister made public their preference for a lower monetary policy rate. While not as intense, this is reminiscent of the earlier difference in opinion between the central bank and the government on the issue of monetary policy—something unseen in the current governor's regime since December 2018.