RBI’s inconsistent view—सविस्तर माहितीसाठी Business Standard मधील बातमी वाचावी.

The decision by the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) to keep the policy rate unchanged was not a surprise. However, the interpretation of the grounds underlying the decision has led to disagreement, even controversy. There are two issues here. The first is the analytical credibility of the MPC’s approach. The second is public dissonance in the views of the finance ministry and the RBI.

The policy rate is on hold since December 2016. In December, the MPC cited volatility in crude oil prices, financial market turbulence, rising food prices, and uncertainties about the impact of demonetisation to hold rates arguing “…it is prudent to wait and watch how these factors play out and impinge upon the outlook…”. In February, the MPC changed its policy stance from “accommodative” to “neutral”. It did not specify what the change in adjective meant but justified holding the policy rate”…to assess how the transitory effects of demonetisation on inflation and the output gap play out…”. In April, the MPC asserted that “underlying inflation pressures persist…”, and foresaw an increase in aggregate demand pressures, while the effects of demonetisation are “distinctly on the wane, and should fade away by the Q4 of 2016-17”. There was now an explicit judgement that inflation was expected to rise. In the latest, June 7 statement, the MPC noted that “the transitory effects of demonetisation have lingered on in price formations…entangled with excess supply conditions with respect to fruits and vegetables…” It went further: “…the current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks. Monetary policy can play a more effective role only when these factors are in place” (my italics).

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