The status quo that isn't

THE RBI HAS USED DISCRETION BEYOND CHISELLING THE MONETARY POLICY ALONE

- SOUMYA KANTI GHOSH

THE UNANIMOUS MONETARY Policy Committee (MPC) decision to hold rates is reminiscent of the term “constrained policy discretion” in economic literature.

While it is used more often to indicate the flexible part of inflation targeting as followed by central banks worldwide, we believe the Reserve Bank of India (RBI) has judiciously moved beyond the rate cacophony in the current policy and used discretion beyond chiselling the monetary policy alone.

The slew of regulatory reforms announced by the RBI add an exotic flavour to the financial markets, enhancing the much-sought ease of doing business, the calibrated loosening of select areas hinting at the maturity of our ecosystem lending value to the financial system’s core competencies.

At the time of writing, the US economy has officially slipped into shutdown. Looking through the shadows of recent events and assertive tone of various stakeholders, it could be more painful than the last instance in December 2018 that had stretched for 35 days. Thus, data quality could be under immense scrutiny in the coming days.

Basis MPC, real GDP growth for FY26 is now projected at 6.8% with risks evenly balanced. Further, a positive monsoon and comfortable stocking of grains have ensured a benign inflationary trajectory. FY26 inflation projections are now at 2.6%, witnessing a 160-basis point downward revision from the April policy. FY27 inflation projections are at 4.5%. However, we believe both FY26 and FY27 inflation numbers are likely to undershoot further. Even the position on liquidity and current account look comfortable, and steps taken earlier on the cash reserve ratio are expected to bankroll the system in the coming quarter.