Fearful Symmetry sees a policy blunder

Fearful symmetry was disappointed that the RBI saw fit to raise interest rates at its mid-quarter review on September 16. One can evince from the statement that the cycle will now enter into an extended pause, which is moderately heartening. The disappointment stems from the fact that the Bank should not have raised interest rates at all if it felt that the growth backdrop had deteriorated sufficiently that it could confidently signal a pause. If it was truly worried about inflation expectations, of which more below, they could have left rates unchanged while maintaining a bias to tighten. Instead, they chose to hike and signalled they no longer have a tightening bias. Which stratagem would give the biggest payoff on the expectations front? It is unclear. Which option carried the greater risk of undershooting on the activity side of the growth/inflation trade-off? Clearly the route they have chosen. Did that sacrifice bring them a guarantee on expectations? No it did not. If monetary policy is fundamentally about the minimisation of unwelcome outcomes, the path taken at this particular meeting may not fit the description.

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