RBI acknowledges the need to abandon its shadow fighting on inflation.

In the just published third quarter review of the macroeconomic and monetary developments, the RBI recognizes that growth risk is the biggest macroeconomic problem now. This is the first time in the last three years that the central bank is speaking for resurging growth momentum. So far, its high interest rate policy is blamed responsible for deepening the slow down. Inflation has not come down to its comfort zone even with the adoption of hard interest rate for so long.

The present stand from the RBI is indicating that the central bank may opt for a policy rate (repo rate) cut in the next monetary policy revision. If it is sincere to the current observation that slow down is a risk factor, the RBI should respond by reducing the repo rate and thus inducing an interest rate decrease which in turn may stimulate consumption and investment demand in the economy. In the microscopic document, the RBI has given enough hints regarding its failure on the inflation front. Despite the hard use of interest rate to fight inflation, the inflation situation remains sticky. “…Balance of macroeconomic risks suggests monetary policy needs to be calibrated in addressing growth risks as inflation turns sticky”
          On growth front, the RBI states that “Improvement in investment climate is a prerequisite for economic recovery”. Without any doubt, to improve investment climate, the RBI should reduce the policy rates. The RBI further notes that demand conditions are not good. “Demand conditions remained tepid, with private consumption continuing to decelerate and with investment yet to recover.” On the inflation front, the RBI observed that Headline and core inflation moderated, but suppressed inflation poses risk to stability.

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