For now, not much elbow room for RBI

A change of guard at RBI is tempting to regard as an indicator of a shift in policy outcome, notably an interest rate cut at RBI's next review meeting in February. Career bureaucrats, the conventional wisdom goes, tend to be more amenable to the gov's view early in their tenure as central bankers. But, eventually, the institutional authority exerts itself in a more autonomous approach. However, this generalisation is too broad to carry conviction. Every new RBI governor - be it a bureaucrat, RBI insider or 'independent' economist - faces a unique set of circumstances that more than offset any subliminal gov-central bank dynamic. Global financial crises, bad loan clean-up, demonetisation and Covid have come to define tenures of previous RBI governors. Sanjay Malhotra's challenges are likely to be specific to his term in office.

Monetary policy that obtains today leaves scope for easing, provided the economy's slowdown endures and food inflation subsides. Yet, the extent of interest rate cuts RBI can undertake is limited. The outer limit of rate movements is well within 2 percentage points with inflation at target. A more realistic assessment would narrow interest rate movements in this downcycle to about 1 percentage point. These may be spread over a series of quarter-percentage-point cuts or a couple of half-percentage-point reductions. If the economy were to indeed stall, monetary levers beyond interest rates will have to be brought into play.

RBI's projection, revised in its December review, places growth within the band GoI is anticipating. A half-percentage-point slippage from a 7% growth trend is typically not a rallying cry for the doves. RBI has started work on bringing interbank rates closer to its policy rate. Going forward, liquidity management will have a bigger role in the policy mix. Disinflation is likely to remain the steeper hurdle, with little scope for rate-setters to look through food inflation.