Monetary policy: RBI's optimism is tinged with chronic concerns

livemint.com:

There are many ways in which designing a monetary policy differs from drafting a Union budget. The budget is an account of money received and spent, overlaid with plans for how to structure expenditure over the next 12 months—depending on a combination of pressing political exigencies and economic imperatives—and proposals for raising money to meet this spending.

At the end of the year, it does not matter if the end- result deviates from the original, as testified by fluctuating budget deficits over the years. But, for monetary policy, the central bank’s think-tank has to use past data to hack a path to the near future, hoping to maintain a comfortable equilibrium between inflation, growth and financial stability.

The monetary policy unveiled on 7 June, in which the Reserve Bank of India’s (RBI) monetary policy committee decided to hold the benchmark interest rate at 6.5% and persist with its stance of withdrawing accommodation, was based on April inflation data. Even though the narrative emanating from Mint Street emphasized that India’s economy is in a sweet spot, growth having revived post pandemic and retail inflation somewhat under control, some wrinkles are visible in the central bank’s policy statement.

The first sign of anxiety, though minor, is RBI’s apparent compulsion to keep an eye on policy actions by central banks in advanced countries. While the US Federal Reserve usually serves as the fulcrum for globally coordinated central bank action, the European Central Bank decoupled on 6 June and cut interest rates ahead of most other major central banks.

This has put RBI in a piquant position, even though it is at pains to emphasize its policy independence. If it cuts rates prematurely, it could lead to some