Why the fight against inflation must remain on the front burner

'A kiss is just a kiss/ A sigh is just a sigh,' crooned Dooley Wilson in Casablanca. If only RBI governor Shaktikanta Das had taken a leaf from Wilson's songbook and limited himself to, 'A pause is just a pause', and left it at that when quizzed about the monetary policy committee's decision to hold rates constant (pause) in April. Everyone would have left everyone guessing, and MPC and RBI would have been on an easier wicket today.

Instead, he chose to be emphatic. 'We want to emphasise and drive home the point it is a pause for this meeting; do not take it as a pause for several meetings in the future or for all times to come,' he had said. Alas. MPC has since opted for a pause in its subsequent meetings in June and September. Going by the look of things, it will do so in October as well.

Yes, Mint Street is far removed from Hollywood. And RBI governors are more at home in the rarified atmosphere of the former. But it was not so long ago that Das won his audience over by quoting from Lata Mangeshkar's, 'Aaj phir jeene ki tamanna hai' (monetary policy statement of February 2022). Had he but done an encore, perhaps quoting Dooley, it would have given him some wiggle room today.

Sure, one cannot fault MPC or RBI for getting it so wrong. After hitting the pause button on interest rates in June, even the mighty US Fed hiked them in July, only to pause again in September.

So, if at one point in time, it looked as though RBI had won the battle, if not the war, against inflation, and could focus on growth, inflation is now back to haunt us. CPI inflation in the first two months of Q2 FY24 averaged 7.1%, and with the September number expected to be over 6%, average inflation for the quarter is expected to be way higher than RBI's projected 6.2%.

Meanwhile, economic recovery has begun to look a bit iffy, never mind the 7.8% growth recorded in the first quarter of the current fiscal. In such a scenario, MPC's hands are virtually tied when it meets later this week.

On paper, MPC has three options: raise rates, lower them, or stay put. In practice, its options are narrower. Raising rates could be dicey for two reasons.

• Full impact of past rate increases - 250 bps since May 2022 - is yet to work its way through the system.
• If, as RBI says, the present phase of high inflation is transient and inflation for the year is expected to average a little over 5%, real interest rates are already sufficiently positive.

Moreover, there are indications that the growth momentum might already be slowing, especially since exports, one of the main drivers of growth in the past, are unlikely to provide much support given continuing geopolitical uncertainties and declining global trade.

Lowering rates is not an option either. Not when inflation is well over RBI's permissible band of 4-6% allowed under the inflation-targeting regime, oil prices are rising, the rupee weakening against a strong dollar and major central banks, including the US Federal Reserve, the de facto central bank of the world, are still in tightening mode.

It is all well to say the present bout of inflation is driven by food, and is likely to be transient. But it's not long ago that central banks burnt their fingers, claiming inflation is transitory when it was anything but. They responded much too late, by which time inflation had taken root. So much so that the world is still struggling with inflation almost two years after that.

So where does that leave MPC? With yes, you guessed it, another pause. For the fourth time in a row. As Nirmala Sitharaman said in a recent interview with ET, 'Central banks are realising... interest rate is not just that one tool which can help. There have got to be so many ways of addressing this [inflation].'

Her angst is understandable. No government would like to go into an election year with high inflation. The problem is that interest rates are the Brahmastra of central banks. Other instruments can only help at the margin.

Das is fond of quoting Mahatma Gandhi. On Gandhi Jayanti today, the best way to end this column is by drawing MPC's attention to what the Father of the Nation called his talisman. 'Whenever you are in doubt...recall the face of the poorest and the weakest man whom you may have seen, and ask yourself, if the step you contemplate is going to be of any use to him. Will he gain anything by it? Then you will find your doubts melt away.'

In today's scenario, that means the fight against inflation must remain on the front burner. Even if it means interest rates stay higher for longer.