There were no surprises from the Monetary Policy Committee (MPC) of the Reserve Bank. It has left its short-term lending rate to banks, known as the repo rate, unchanged at 6 per cent. It also left the cash reserve ratio unchanged at 4 per cent. The MPC however acknowledged the slowing down of economic activity by lowering the gross value added projection for FY2018 to 6.7 per cent from the earlier 7.3 per cent.
The MPC expectedly has adopted a conservative approach. It has noted that global cues are positive, that the BRICS countries like China and Brazil have shown a strong resurgence, and that global trade improved significantly in 2017. On the domestic front, the MPC noted that the second quarter saw a good monsoon and expectation of a better kharif harvest. The Index of Industrial Production (IIP) too improved in July.
However, that said, the MPC buckled under the bear hug of retail inflation noting that the Consumer Price Index (CPI) has climbed by 190 basis points in the last two months due to spiralling food and fuel prices. It also felt more inflationary pressure was expected from rising international crude prices and farm loan waivers. In sum it decided to keep interest rates unchanged and not add money supply as a fuel to the inflationary fire.
Significantly, it was not a unanimous decision. While five members of the panel voted for unchanged interest rates, Ravindra Dholakia, one of the external members voted for a cut of 25 basis points. He perhaps represents the voice of a large body of investors and businessmen who want to see faster growth. An interest rate cut could have helped reboot the system currently paralysed by the twin blows of demonetisation and the new GST regime.
With the GDP growth rate falling to 5.7 per cent and private investment in new projects virtually drying up, this is the time for the mandarins of the Reserve Bank to adopt imaginative policies. Unfortunately, all the indicators point to a conservative no-change-in-interest-rates policy continuing till the next fiscal.