MPC has been behind the curve on reducing interest rates
Monetary Policy 2017-18
In the August statement, the majority of the MPC voted for a reduction in the repo rate to 6% from 6.25% Four MPC members voted for this reduction; one member, Dr. Ravindra Dholakia, voted for a reduction by 0.5%, and another, Dr. Michael Patra, voted for the status quo.
The statement makes no change in the expected growth for FY2017-18 - as in the June statement, economy is expected to grow at 7.3%. There is some change in the inflation path going to the end of this financial year - not expected to hit 4.5% but a little above 4% .
Please read my blog of July 27,2017 titled Monetary Policy: A look back over the last year. I had argued then that the MPC should reduce the repo rate by 0.5% at the August statement.
I do not want to reiterate my views. One point though deserves comment. In the media call Governor Patel seemed to suggest that given the uncertainty it made sense to keep the real interest rate higher than the RBI's stated goal of about 1.5%. At 4% inflation and the one year treasury bill rate at 6.2%, it comes to 2.2% (against the repo rate, it comes to 2%).
My view is that this argument is weak. If anything in the current environment, the RBI's range for the real rate should be lower. I quote here from my July blog: "But given the stress (some may call it a crisis) in the financial system through bad loans and historically low levels of credit flows and shock through demonetisation, the MPC and RBI needed to focus not just on standard macroeconomic factors underlying output and prices, but also on the money flows in the financial system. This would give a clearer perspective on where the hold the key policy rate, the repo rate. It would also give a better sense on where the real interest rate should be – the current level of 1.5%-2% or arguably lower."
Since the statement we have had numbers on inflation and growth. Inflation has trended up to 3.36% in August from 1.46% in June, in line with expectations. But growth in the June quarter came in well below expectations at 5.7%. One year ago, the June quarter saw the economy growing at 7.9%!
Please read my blogs on demonetisation - "Demonetisation and GDP growth in fiscal year 2016-17: A presentation of three subjective scenarios" and "RBI sees demonetisation as a non-event: Prescience or helplessness?".
Monetary Policy 2017-18
In the August statement, the majority of the MPC voted for a reduction in the repo rate to 6% from 6.25% Four MPC members voted for this reduction; one member, Dr. Ravindra Dholakia, voted for a reduction by 0.5%, and another, Dr. Michael Patra, voted for the status quo.
The statement makes no change in the expected growth for FY2017-18 - as in the June statement, economy is expected to grow at 7.3%. There is some change in the inflation path going to the end of this financial year - not expected to hit 4.5% but a little above 4% .
Please read my blog of July 27,2017 titled Monetary Policy: A look back over the last year. I had argued then that the MPC should reduce the repo rate by 0.5% at the August statement.
I do not want to reiterate my views. One point though deserves comment. In the media call Governor Patel seemed to suggest that given the uncertainty it made sense to keep the real interest rate higher than the RBI's stated goal of about 1.5%. At 4% inflation and the one year treasury bill rate at 6.2%, it comes to 2.2% (against the repo rate, it comes to 2%).
My view is that this argument is weak. If anything in the current environment, the RBI's range for the real rate should be lower. I quote here from my July blog: "But given the stress (some may call it a crisis) in the financial system through bad loans and historically low levels of credit flows and shock through demonetisation, the MPC and RBI needed to focus not just on standard macroeconomic factors underlying output and prices, but also on the money flows in the financial system. This would give a clearer perspective on where the hold the key policy rate, the repo rate. It would also give a better sense on where the real interest rate should be – the current level of 1.5%-2% or arguably lower."
Since the statement we have had numbers on inflation and growth. Inflation has trended up to 3.36% in August from 1.46% in June, in line with expectations. But growth in the June quarter came in well below expectations at 5.7%. One year ago, the June quarter saw the economy growing at 7.9%!
Please read my blogs on demonetisation - "Demonetisation and GDP growth in fiscal year 2016-17: A presentation of three subjective scenarios" and "RBI sees demonetisation as a non-event: Prescience or helplessness?".
