It was a textbook policy; Guv mentioned risks but was also positive on growth and investment revival: Abheek Barua

Congratulations you did call right on that 50 basis point hike but are you a little surprised that the RBI prefers to retain that withdrawal and accommodation phase rather than shift to neutral? Is there some contradiction there that you see?
No not at all. I think the notion of stance to address the second question has changed quite considerably. We do not have that earlier taxonomy of neutral, accommodative and restrictive being mentioned in policies anymore. So the stance has really become defined in terms of the availability and the price liquidity.

If the overnight rates are above or at the repo rate for a sustained period of time, then you move from accommodative to neutral and then it is higher, then it is restrictive. So the notion of stance in this current dispensation has changed.

Number two, the panning out of geopolitical risks as we have seen over the last many months has been on balance. It tends to push inflation up. For instance, if there is a China-Taiwan war, semiconductor prices that have moderated over the last few months are likely to go up again because Taiwan is the biggest manufacturer of chips. So the uncertainty is there but the uncertainty associated principally with higher inflation risks.

Number three, I thought this policy was out of a textbook. The Governor did mention the risks but he is reasonably positive on growth including on investment revival. He mentioned the capacity utilisation numbers on inflation. They have been above the tolerance band for six months and he sort of acknowledged that and it is likely to be there for the next few months. So what will the central bank do when inflation has busted its tolerance band for so long and is likely to remain in this way.

He also mentioned that inflation is not just focussed or concentrated in one category or one or two categories but it is broad based; core inflation is high. I thought given this combination, the automatic response would be a frontloaded and reasonably aggressive move on the rate front. We get to a terminal rate which is inevitably higher than what it was till now. I think it is around 6%.

One thing which might give some comfort to people is that unlike other policies, there was a huge amount of discussion on the external balances, the resilience of the external balance, the availability of reserves, external debt to GDP ratio, etc, I think the RBI is in a sense communicating its preference for less volatile rupee.