RBI puts onus on the government

In line with expectations, the RBI on Wednesday kept policy rates unchanged.

In line with expectations, the RBI on Wednesday kept policy rates unchanged. The status quo comes even as its Monetary Policy Committee, during its two-day diagnosis of the economy, rightly took note of the essentials: The need to revive private investment, to restore the banking sector’s health, and to remove infrastructural bottlenecks.

It even deliberated thoroughly on global political risks, rising input costs and wage pressures, the twin balance sheet problem—over-leveraged corporate sector and stressed banking sector—and the weak private investment demand. Yet, the 6-member panel voted 5-1 to maintain status quo, for a simple reason that inflation may be benign and the panel exercised prudence. The move created a rift between North Block and Mint Street, but reaffirms the RBI’s authority not to buckle under pressure to lower rates.

Governments want governors who can magically fight inflation and at the same time be sensitive to the needs of the broader economy, tinkering rates at will. Monetary policy is a long game and its effects have a time lag, sometimes as late as two years. Right now, Indians are experiencing one kind of economy—fewer jobs, expensive housing and rising standard of living. But RBI is seeing another kind of economy, probably due to foresight. This blinkered view seems alarming for policy watchers, but it’s pertinent to remember that RBI’s mandate is to keep inflation at a “Goldilocks” level: not too hot, nor too cold.
By the government’s own admission, the economy has been slowing down for some quarters and demonetisation punctured it severely.

Stalled projects are piling up, protectionism fears are unsettling sectors like IT, and investment is constrained by the unwillingness or inability of banks to lend. And the financial markets want governor Urjit Patel to do more than just talk. But he is adamant that monetary policy can play an effective role only when the above factors are in place. By not cutting rates, RBI has put the onus solely on the government to find ways to goose the economy.

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