Propping up the RBI’s credibility–Economic Times–16.06-2017

  1. While considerations of growth would have made a rate cut a positive gesture of accommodation, the Monetary Policy Committee’s (MPC) decision to hold its policy rates is, on the whole, welcome.
  2. What holds up investment and growth is not the cost of borrowing, but the combination of over-leveraged firms and the banks’ bad loan portfolio.
  3. So, cutting rates would have no immediate, direct impact on growth.
  4. Further, what the MPC seems to be focused on is reinforcing the RBI’s credibility, dented by the demonetisation exercise.
  5. Its refusal to oblige the finance ministry with a formal meeting to receive ministry instructions, and to stick to its inflation focus, both enhance central bank credibility.
  6. So does the 50-basis-point cut in the statutory liquidity ratio, the share of total deposits banks are obliged to invest in government bonds, to 20 per cent effective June 24. That call rates have been marshalled firmly into the policy rate corridor is proof of enhanced monetary policy effectiveness.
  7. Significantly, the central bank has cut its projection for consumer inflation to 2-3.5 per cent in April-September, down from 4.5 per cent earlier, and to 3.5-4.5 per cent in October-March, down from 5 per cent earlier.
  8. The change in forecast comes after consumer prices rose in April at their lowest annual rate in at least five years, slowing to 2.99 per cent, well below the RBI’s expectation of 4.0 per cent. But the regulator worries about sticky core inflation due to rising rural wage growth.
  9. The rising demand for farm loan waivers is a potential risk for fiscal slippage, apart from the oft-repeated concerns over the Seventh Pay Commission award implications.
  10. The rise in food grain stocks to over 60 million tonnes is a dual threat: the lower supply of grain in the market pushes prices up directly and the larger food subsidy bill produced by higher grain stocks strains fiscal discipline.
  11. The RBI appears a shade too sanguine on the inflationary impact of GST. GST is designed to bring goods and services that today escape taxation into the tax net and there is bound to be a one-time bump in inflation, when indirect tax collections rise.


  • This piece appeared as an editorial opinion in the print edition of The Economic Times.

via Propping up the RBI’s credibility

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