RBI Policy: Right move to hold rates, stance – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/rbi-policy-right-move-to-hold-rates-stance/articleshow/86877337.cmsSynopsis

It was right and bold on the MPC’s part to suggest the way to tackle the spike in fuel prices is to lighten the tax burden on fuel prices, rather than to use monetary policy tools to contain it.

The RBI and its Monetary Policy Committee (MPC) have done well to maintain the status quo on policy rates and the accommodative stance of monetary policy. The decision to begin mopping up the liquidity sloshing around in the system without any purpose other than to offer the comfort that shortage of credit would not constrain economic recovery is spot on as well. The continuation of various measures, such as liquidity for small finance banks, geotagging of payment infrastructure and raising the IMPS transfer limit to ₹5 lakh, is also welcome. The introduction of one more theme to the regulatory sandbox for fintech, that of preventing financial fraud, is forward-looking. What deserves comment is the absence of any regulatory move to capitalise on the recent operationalisation of the consent layer in financial data, via the Account Aggregator ecosystem.

It was right and bold on the MPC’s part to suggest the way to tackle the spike in fuel prices is to lighten the tax burden on fuel prices, rather than to use monetary policy tools to contain it. Much of the rise in inflation comes from supply-side disruptions, rather than from excess demand. It makes sense to feed cost-push inflation into the system, so as to let higher prices curb demand and boost supplies, rather than to suppress it. Further, there is every reason to believe that energy prices could lose some of their bite: Russia has agreed to supply additional gas to Europe and diplomatic efforts could persuade oil cartel Opec to raise its members’ oil production. Oil prices that stay above $70 to the barrel should reactivate shale oil, as well. Another major source of recent inflation is shipping. Fleets will get replenished, and their movement, regularised, sooner rather than later.

Regulatory measures that can improve credit flow in the economy would include measures to replace informal sources in trade finance. Small firms offer extended credit to their large buyers. Regulation and mandates should make banks insert themselves in this credit, sparing small firms a role as lenders.

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