INSUBCONTINENT EXCLUSIVE:
But in a break from the past, the Monetary Policy Committee (MPC) is meeting a day ahead of schedule and for three days (June 4-6), instead
Indeed, even as you read this, MPC is meeting to wrestle with the issue of the right monetary fix to address the complex macro-economic
limited.
So, how should we interpret this break from the past As an admission that MPC is as foxed as the best in its field and needs more
grudge MPC an additional day.
Remember, unlike unforgiving commentators who have the benefit of hindsight, MPC has to frame policy for a
behaviour of inflation is becoming increasingly difficult to understand
The answer: not very much.
Janet Yellen, former chair of the US Federal Reserve, admitted as much
But in terms of rate action, it has only one of three choices: cut rates, maintain status quo and hike rates
Cutting rates is clearly a nono
Not when inflation is inching up, even if growth is far from the turbocharged days before demonetisation and the goods and services tax
(GST) took the sheen away
Not when central banks in emerging market economies (Argentina, Indonesia, Malaysia, Philippines, Turkey and China) have raised rates and
overseas investors are exiting in droves
Remember, MPC meets just a week before the Federal Open Markets Committee, the rate-setting body of the US Fed, meets to raise interest
rates.
So, the choice really boils down to retaining the repo rate (at which RBI pumps in liquidity into the system) at 6 per cent or hiking
Supporters of status quo may argue that a hike in rates could threaten the nascent economic recovery
policy action was in October 2017, when MPC cut the repo rate by 25 basis points.
MPC Must ActSo, while a rate hike might affect sentiment,
According to official data released on May 31, every successive quarter of 2017-18 saw GDP growth rate up 0.7 percentage points, with growth
increasing from 5.6 per cent in Q1 to 7.7 per cent in Q4 (December-March 2018)
Given the long leads and lags, monetary policy has to be pre-emptive and forward-looking, more so in an inflation-targeting regime.
When
inflation is on the rise and an intelligent reading of the tea leaves suggest further rise, MPC must act
Before, not after, the event.
RBI can do its bit to soften the blow
Availability of credit is as important as its cost
MPC may have a key role in determining the cost of credit
Economics 101tells you that one of the main sources of money supply (currency with the public plus demand and time deposits) is bank credit
few more, the ability of the banking system to create money is severely impaired
This impacts the cost of credit and, even more, its availability.
So yes, a rate hike by MPC, though warranted, may seem harsh
But RBI can take some of the sting away by being pragmatic on the banking front
