On RBI’s sudden decision to raise interest rate:

I think it was the right decision. The RBI has a formal mandate to keep inflation, as measured by the CPI, at a target of 4%, with a range of 2 percentage points either way. It is a flexible mandate, which means it must also keep in mind the need to support growth in the economy, but the primary objective is inflation targeting. Since CPI had edged above the upper limit, action was necessary. Since it takes about six months for monetary policy to have an impact, RBI had to anticipate where inflation would be some months down the line. In February, they thought the uptick in inflation was temporary.

However reasonable that assumption may have been in February, it is clearly not so now. The Russia-Ukraine war has raised oil prices, food prices and other commodity prices. Inflation is resurgent in the rest of the world. The US reports 8.5% and Europe around 7.5%.

On whether the move is enough to curb inflation:

It is the first step. We also have to recognise that tightening short-term rates does not guarantee curbing inflation, especially when the initial inflationary push comes from global commodity price increases. However, the impact of external inflation on other domestic prices can be moderated by a monetary policy that is less accommodative. It is not a good idea to allow inflationary pressure to build up and then try to correct it later when it has gathered momentum. Delaying action does not protect growth — it only delays the adverse impact and makes it sharper. And it lowers the credibility of the central bank, giving the impression of a deer transfixed in the headlights, unable to move.

On its impact on growth:

We should not exaggerate the effect of a change in the repo rate on growth. The central bank affects the real economy not just through short-term interest rates but through a host of other instruments, including the quantity of money, the level of credit and liquidity and, more broadly, financial stability. The impact of monetary and credit policy should be seen in terms of the total impact. There are also other instruments of policy that can and should be deployed by other wings of government to achieve that objective. They are not in the control of the central bank and they need more attention at this point.

Also, no central bank governor wants to spoil the party (by raising rates). However, Governor Shaktikanta Das can take comfort from the candid admission of one of his predecessors, Duvvuri Subbarao, that with the benefit of hindsight he was perhaps too slow in reversing course after the monetary relaxation of 2008, leading to the moniker ‘Baby Steps Subbarao’.