News & Analysis

Monetary Policy and Its Reducing Impact

RBI deputy governor Michael Patra has raised a pertinent that should have been debated at least two decades ago

Ever since India began integrating its economy with those of other countries back in 1991, both economists and market watchers have spoken under their breath about RBI’s monetary policies and its ever-reducing impact on economic growth planning. However, now the question has come from none other than one of the central bank’s own officials. 


RBI deputy governor Michael Patra, who is in charge of the monetary policy functions and has spent a lifetime at the central bank, believes that monetary policy alone cannot influence India’s economic growth, but only support it by creating congenial factors. RBI comes out with busy-season and slack-season interest rates every six months as part of this routine. 


The official admitted that formulating monetary policy is way more challenging in the current global scenario because of the need for frequent reviews based on global economic cues as well as the data lags such a system presents. The next meeting of the monetary policy committee which fixes interest rates is scheduled for December 5. He was speaking at a conclave organized by the State Bank of India. 


Data lags and revisions makes things tougher

Patra pointed out that most often these policy decisions are taken based on data that is between one to three months old. For example, RBI would assess the old inflation data and project its journey one year down the line, which essentially means that forward looking policy is based on data which is old. 


While wholesale price based inflation rates are calculated with a lag of about three to four weeks, those based on consumer prices come in much later. So, when RBI meets to discuss the interest rates in December it would be actually assessing inflation data from October and growth numbers over the July to September quarter. 


Are periodic rate revisions relevant?

In the past economists have made a case for doing away with these once-in-six-months revision of interest rates, though the RBI does come out with revisions in the interregnum these days due to the fact that these numbers have a direct correlation with how the Fed Rates are moving and what sort of pressures domestic inflation is under. 


Patra pointed out these dichotomies whereby in spite of the global financial crisis, inflation rates were hardly budging for a while, but things took a dramatic turn suddenly as inflation reached levels never seen before in the past four decades. This, despite the aggressive and front-loaded monetary policy tightening measures taken by several central banks. 


The RBI official wondered whether the world was now shifting permanently to a high-inflation era and that being the case was the time ripe to review the objectives of India’s own monetary policy framework. Patra also noted that while government data gets revised almost always, RBI doesn’t have the luxury to revise interest rate movements.


Retrospective revisions not possible

In fact, most numbers from the government get revised one way or the other, right from the data provided by the National Sample Survey Office (NSSO) to earnings reported by companies as part of their compliance measures and even the budgetary numbers provided by the government as part of its commitment to the Parliament.  


The point that Patra was making and most economists have vouched for in the past is that monetary policy is a forward looking statement on how the central bank perceives the risk perceptions in the future with interest rate changes only getting transmitted with a lag. They get reflected in lending rates, mortgage rates and yields only over a period of time. 


And more important is the fact that RBI’s monetary policy is just a framework around which the industry and agriculture has to work, keeping in mind that external volatility and domestic challenges could be skulking around-the-corner, just as the Ukraine war emerged out of the blue causing both oil and food prices to spike in India. 


Leave a Response