The Reserve Bank of India (RBI) caught the markets by surprise — of the pleasant kind — in its February monetary policy statement. The Monetary Policy Committee (MPC) was widely expected to hike the reverse repo rate, now at 3.35 per cent, to normalise the rate ‘corridor’. In the event, the MPC refrained from tinkering with rates, but what was more surprising was the projection on inflation and the continuation of the accommodative policy stance. Inflation has been on the upcurve since September 2021 — it was at 5.59 per cent in December 2021 and pressures have only intensified over the last one month. Crude oil prices have shot past the $90 per barrel mark. Domestic fuel prices have remained unchanged in the last couple of months, but it is only a question of time before they are revised upwards. Though food prices have softened, prices of other industrial commodities such as steel and cement, to name just two, have been on the upswing. User industries such as FMCG and automobiles have, in turn, adjusted their products prices upwards. In short, the cost-push pressures on inflation are very apparent. Yet, the central bank has actually revised its projection for the first quarter of FY23 downwards to 4.9 per cent, from 5 per cent that it had forecast in its last policy statement in December. By Q3 of FY23, inflation will be at the mandated level of 4 per cent according to the RBI. The fervent hope is that the RBI is right in its estimate because the rest of the policy, including the accommodative stance, flows from it.

Yield on the 10-year paper fell to as low as 6.69 per cent post the policy — it closed the day at 6.73 per cent, down 6 basis points — as the bond market rallied riding on the optimistic picture painted by the RBI.The RBI’s ploy is not hard to discern: it will try to cool yields to facilitate a gross government borrowing programme of ₹14.95-lakh crore for 2022-23, ₹4.5-lakh crore in excess of the borrowings for this fiscal (revised estimates). Perhaps, the RBI is of the view that this borrowing will not stoke inflation when private investment is tepid, or it hopes that the actual borrowing will be lower. Anyway, by not adjusting rates now, the RBI is sending a signal to the market to fall in line with its optimistic assessment. Yet, if the scenario does not play out as per the RBI’s view — and that’s a real possibility — the central bank may find itself in a spot in the next policy, by which time the markets would have run far ahead of the RBI. The best chance to align rates to the market may have been in this policy when the markets were anticipating it.

The Governor was at pains to explain in the post-policy press conference that India’s position should not be compared with that of advanced countries in the matter of inflation. One hopes that the RBI is right, but the assessment seems to be that the central bank is falling behind the curve. Perhaps, the central bank felt persuaded not to rock the boat in a busy credit season. Or it probably knows something that the market does not at this point in time.

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