As the Indian economy grapples with the persistent challenge of inflation, the Reserve Bank of India (RBI) and the Monetary Policy Committee (MPC) have orchestrated a series of strategic measures throughout the 2023 calendar year. These actions, spanning policy changes and interest rate adjustments, reflect a proactive approach to maintaining economic stability while fostering sustainable growth. Remember, RBI Governor Shaktikanta Das has often referred to keeping ‘Arjuna’s eyes’ on galloping inflation rate that has singed consumers in India and kept policymakers busy in 2023.
Das has several times used the Arjuna analogy to clearly state that the RBI’s focus is to bring inflation to 4 per cent and not just within its tolerance band of 2-6 per cent. On most occasions, however, he has referred to ‘Arjuna’s eye’ as a means to drive home the inflation focus, without expanding its theme.
The year started with inflation hovering around 6.5 per cent, above the RBI’s tolerance band of 2-6 per cent. In the face of rising inflationary pressures, the RBI took the center stage in implementing measures designed to curb this economic menace.
Policy changes
One of the key pillars of the RBI and MPC’s strategy in 2023 has been the implementation of targeted policy changes. These adjustments aimed to fine-tune the monetary environment and address the root causes of inflation.
Notably, the central bank introduced a recalibration of the liquidity management framework. This move, designed to enhance the effectiveness of monetary policy, allows for more nuanced control over liquidity in the banking system.
The rationale behind these policy changes lies in the recognition that managing inflation requires a holistic approach. By refining the tools used for monetary policy implementation, the RBI and MPC seek to exert a more precise influence on inflation dynamics, aligning their actions with the broader economic goals of the nation.
Interest rate adjustments
In tandem with policy changes, the RBI and MPC strategically deployed interest rate adjustments to navigate the evolving economic landscape. Throughout the year, a series of carefully considered rate cuts were introduced, signaling a concerted effort to stimulate economic activity while maintaining a vigilant stance on inflation.
The RBI had raised the repo rate last in February 2023, when it was raised to 6.5 per cent. With the RBI continuing to maintain tight liquidity, short-term rates are hovering around 6.85-6.9 per cent, which is 35-40 basis points (bps) higher than the repo rate.
One basis point is equal to one-hundredth of a percentage point.
The delicate balancing act between supporting growth and preventing overheating in the economy is evident in these interest rate adjustments. By providing monetary stimulus through rate cuts, the RBI and MPC aim to encourage borrowing investment and spending, thereby fostering economic growth. However, this was coupled with a keen awareness of the potential risks associated with an excessively loose monetary policy, particularly in the context of inflation.
Impact and challenges
The impact of these measures on the overall inflation scenario is a subject of ongoing analysis. While the RBI and MPC’s proactive stance is commendable, the efficacy of these strategies will become clearer as time unfolds. The impact of higher rates is still transmitting into the system.
