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RBI's monetary statement

Kashmir Times. Dated: 10/6/2017 10:28:41 AM

By retaining policy rates, the Central Bank has shifted focus to the government to give a fillip to economic growth

In its bi-monthly meeting on October 4, 2017, the Reserve Bank of India's Monetary Policy Committee (MPC) has right from its inception retained its focus on its primary objective of preserving the price stability for the months to come. It follows then that the RBI's rate setting committee opted to leave the benchmark interest rates unchanged and adopted a neutral stance to achieve the medium-term target of keeping the Consumer Price Index inflation around 4 percent in a durable basis while supporting the economic growth. Spelling out the rationale for the decision, the MPC felt that with global crude oil prices having "firmed up further" amid a pick-up in demand and tighter supplies in the wake of OPEC's production cuts, the threat of upward pressure on accelerating inflation has increased appreciably. Added to this is the uncertainty posed by the prospects of weaker-than-anticipated Kharif crop output and the impact this may have on food prices, and the concerns agitating policymakers will be evident. There are also the not-so-small matters of farm loan waivers by states that could roil the quality of public spending and exert price pressures - as well as the question of when states may decide to implement their own salary and allowance increases in the wake of the Centre's Seventh Pay Commission implementation. All these factors that have been affecting the economic growth in the country, the Central Bank has shifted the focus of fuelling the growth to the central government, which has been maintaining that growth will pick in due course of time. This does not mean that the RBI has not taken into consideration the jobless growth in the country since the demonetisation announced last year and GST implementation which has left many loopholes in the process. In fact, the capital being held up in the government exchequer after the filing if returns and deposits made by the traders as GST for the month of July, 2017. The traders and manufacturers have also filed their claims for refund of GST which amount to Rs 65,000 crore out of a total collection of Rs 92,000 crore. The capital lying in the government accounts does not appear to be refunded by the NDA-government till the end of October this year because of hardships being faced in maintenance of accounts. This is happening despite the assurances of the government that all the infra-structure will be set right by October 15, 2017. Some of these factors have already been calculated by the RBI while the review was going on.
On the face of it, the statement accompanying the rate decision points out, CPI inflation has risen by around two percentage points since the MPC's last meeting in August: from 1.46 percent in June 2017, to a provisional 3.36 percent in August. The RBI's September survey of household inflation expectations too has shown in qualitative responses a marked uptick in the proportion of respondents expecting the general price level to increase by more than the current rate. The amount of domestic pressure points on prices has also coincided with, in the MPC's words, "an escalation of global geo-political uncertainty and heightened volatility in financial markets due to the US Federal's plans of balance sheet unwinding and the risk of normalisation by the European Central Bank." In the face of such a "juxtaposition of risks" to the outlook for price stability, the overwhelming majority of the MPC's six members saw little choice but to hold rates; there was a solitary dissent vote for a 25 basis points cut. RBI's policymakers side by side have raised their inflation projection for the second half of the current fiscal to a 4.2-4.6 percent range and cut the estimate for real Gross Value Added growth this year to 6.7 percent, from the August forecast of 7.3 percent. Reiterating the urgent imperative to 'reinvigorate investment activity' to spur growth, the MPC has laid the onus squarely on the government's shoulders: from suggesting the recapitalisation of stressed state-owned lenders, to calling for further simplification of the GST regime and urging that stalled public sector investment projects be restarted. The baton has been passed and now it is for the Centre to do the running. Apart from this, the RBI has also put the onus on the government to make course corrections for 'Make in India' and 'Start up' projects in the near future which have been held up due to shortage of cash circulation since last year. The after-effects of demonetisation are still having ripple effects on rural and agriculture economy, which was badly hit. Now it is up to the central government to find and innovate ways and means for reviving the economic growth.