Criticising RBI for delayed rate hike unfair, says Subbarao

NEW DELHI: The criticism that the Reserve Bank of India was behind the curve in hiking interest rate to tame rising inflation is unfair, former RBI Governor D Subbarao said on Wednesday and asserted that it is difficult for any central bank to anticipate the future more accurately.

Earlier this month, Monetary Policy Committee (MPC), the central bank’s rate-setting panel, surprised the markets with a 40 basis points hike in repo rate in an off-cycle policy meeting. It was also the first rate hike after August 2018, amid spiralling inflation.

Subbarao further said given that monetary policy acts with a lag, this rate hike, by itself, is unlikely to bring inflation down in a hurry.

“I saw that the hurried action to tighten monetary conditions through an off-cycle MPC meeting raised several questions,” he said, responding to a question why RBI did not raise interest rate much earlier despite rising inflation.

“Was the RBI sleeping at the wheel even as inflation was soaring? Did it go overboard in prioritising growth over inflation? Won’t the delayed action cost heavily in macroeconomic terms? Will this scrambling hurt RBI’s credibility?

“I believe that this criticism is unfair,” he said. Retail inflation surged to an eightyear high of 7.79 per cent in April this year while inflation galloped for the seventh straight month. RBI has been mandated by the government to ensure that inflation remains at 4 per cent with a margin of 2 per cent on either side.

While pointing out that the RBI, like other central banks around the world, had to act under astonishing uncertainty brought on by rapidly unfolding geopolitical developments, Subbarao said in early April when the last scheduled MPC meeting took place, the war in Ukraine had been on for weeks, but even seasoned military experts and experienced diplomats were wrong in predicting its course.

“It’s unfair to expect central banks to anticipate the future more accurately,” Subbarao asserted.

The former RBI Governor noted that the inflation trajectory going forward will depend on the pace and quantum of policy tightening over the next few cycles.