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Home / Business / RBI scouts for escape hatch to kickstart economy

RBI scouts for escape hatch to kickstart economy

Inflation is ruling at 6.93 per cent and will run away unchecked unless the central bank raises interest rates
If inflation stubbornly stays above 6 per cent for three consecutive quarters, RBI governor Shaktikanta Das must write to the Centre and explain why the central bank failed to do its job.
If inflation stubbornly stays above 6 per cent for three consecutive quarters, RBI governor Shaktikanta Das must write to the Centre and explain why the central bank failed to do its job.
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Our Special Correspondent   |   Mumbai   |   Published 21.08.20, 12:49 AM

The Reserve Bank of India’s policymakers are grappling with a stark dilemma. If they do not cut interest rates, it may be hard to kickstart a moribund economy.

But inflation is ruling at 6.93 per cent and will run away unchecked unless the RBI raises rates — which isn’t an easy option to exercise in the current economic situation and will spark a caterwaul of protests if it does so.

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The policy mandate requires the wise men on Mint Street to hold inflation at a mid-point of 4 per cent, with a tolerance limit of 2 per cent on either side. If inflation stubbornly stays above 6 per cent for three consecutive quarters, RBI governor Shaktikanta Das must write to the Centre and explain why the central bank failed to do its job.

The pandemic is a great excuse — but the RBI is understandably reluctant to admit failure. Retail inflation has stayed above 6 per cent for two quarters. In July, it surged to 6.93 per cent, which means it has two more months before it hands in a botched report card. It is this dilemma that seeped into the discussions of the monetary policy committee meeting held between August 4 and 6.

The minutes of the meeting, which were released on Thursday, show that the policymakers were casting about for an escape hatch to avoid having to make that dismal report of failure. The MPC noted that the imputed inflation numbers for April and May mark a “break in the CPI series”.

RBI deputy governor Michael Patra warned that if inflation persists above the upper tolerance band for one more quarter, the monetary policy will be constrained by the mandate to undertake remedial action — which means raise rates.

Ravindra Dholakia said imputation of the inflation numbers may provide misleading signals and it is prudent to ignore them and wait for more reliable estimates.



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