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RBI VS GOVT, A CASE OF GREED OR CONVICTION?

In unprecedented case that all members of the monetary policy committee turned down to meet finance ministry officials. Then the central bank keep rate unchanged and unwilling to put its credibility at stake by cutting rates when it is unsure of the outcome.

RBI : What a rate cut will do is stoke an already robust consumption demand and this has inflationary impulses. The policy statement notes the strong year-on-year growth in consumption expenditure in the latest GDP (gross domestic product) data.

Paragraph 17 of the policy statement suggests that RBI believes rate cuts won’t help the economy get its mojo back. “The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks. Monetary policy can play a more effective role only when these factors are in place,” said the statement.

GOVT : Inflation has been lowered in last two month which made strong case for cutting rate. Data supports govt’s argument such as, consumer prices in India increased 2.99 percent year-on-year in April of 2017, following a 3.81 percent rise in March and well below market expectations of 3.5 percent. It is the lowest inflation rate since the series began in 2012.

FACT SHEET :Lowered inflation argument stated by GOVT majorly driven by low food inflation. The arguments further lose ground as there is already strong consumption demand and strong year-on-year growth in consumption expenditure in the latest GDP (gross domestic product) data.

It is of the essence to resolve the bad loan mess of banks and kick-start private investment demand before a rate cut. Also, unless there is a fiscal policy push to remove infrastructural bottlenecks, a rate cut will serve no purpose at all. All of these tasks are easier said than done and could stretch beyond the current fiscal year.

For instance, efforts to resolve the bad loan problem began almost two years back and the resolution process is nowhere near conclusion. In another part of the statement, RBI says that “targeted intervention to create greater lending capacity for healthier sectors” will work better than a blanket rate cut.

RBI argument justified the case of holding rate cut and GOVT needs to make effort to make fiscal improvement and boost growth by creating conducive environment.

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