India’s political economy:Higher-for-longer policy rates pose a peculiar problem

livemint.com:

As nations, both India and the US have shared civilizational values, especially the unshakeable belief in democracy as a just and equitable political model. There is another critical area where commonality seems to be emerging: the path that leads from monetary policy to the political economy. The US central bank, the Federal Reserve, and the Reserve Bank of India (RBI) are both confronted with a quandary that has implications for the theatre of politics.

Both central banks are under pressure to cut benchmark interest rates, but find their hands tied by an odd growth-inflation dynamic. Wall Street, for example, looks convinced that US inflation data for March—at 2.7%, up from February’s 2.5%—may prolong the wait for interest rate cuts. In the face of strong growth impulses and robust hiring numbers, the US Fed is likely to keep its principal policy rate—currently at 5.33%—higher for longer.

This has sparked off a debate over the utility of restrictive rate structures and whether policy has been tightened sufficiently over the past few months to rein in growth impulses, consumption expenditure and their feedback loop with inflation. India’s central bank faces a somewhat similar conundrum. RBI initiated rate hikes around the same time as the Fed in 2022, coupled with a bespoke liquidity play.

This disinflationary strategy did yield dividends, but only up to a degree, given that Indian inflation right now is primarily a supply-side phenomenon. So, while the rise of India’s consumer price index has slowed from 5.7% in December 2023 to 4.9% in March 2024, its volatile elements remain elevated. The rate of food inflation, for instance, was 7.7% in March, slightly lower than February’s 7.8%.