RBI Monetary Policy | Dr. Alok Sheel RBI Chair Professor in Macroeconomics, ICRIER

As widely expected, RBI has once again left policy rates unchanged. The ground situation has not materially changed since its last few monetary policy announcements. If anything, the dilemmas arising out of stagflation and the trilemma have been magnified. First, the inflation scenario, including RBI’s own expectations, has worsened even as growth and employment have still to recover.  Second, the threat of reversal in US Federal Reserve policy sooner rather than later has increased. Inflation has persistently exceeded the Federal Reserve’s forecasts, even as US growth has been robust. The rule of the thumb in such circumstances is to raise rates. Economists such as John B Taylor and the Wall Street Journal are calling the persistence of near zero policy rates under the current US Fed Chair as the most reckless since Arthur C Burns whom history  has  held accountable for igniting the great inflation of the 1970s. This puts the RBI somewhere between a rock and a hard space, transfixed like a deer in the headlights of a car at night, unable to decide whether to lower rates to revive investment, or raise them to target inflation and possible capital outflows. Despite high fiscal deficits, there is little that monetary policy can do in the current circumstances. The heavy lifting needs to be done by fiscal policy which has been conspicuous by its absence.