RBI Monetary Policy Review, April 6, 2017: Moneylife Report

RBI’s Bimonthly Monetary Policy Review, April 6, 2017
(Moneylife report)
“The RBI has done its best with the limited tools at its disposal to control inflation and address the problems that have been ailing the economy. Now, the onus is on the government to revive growth along with supplementing the RBI's efforts in containing inflation. However, the current financial year has been off to a bad start on that front.

As RBI Governor Urjit Patel pointed out, the Uttar Pradesh government's decision to waive off farm loans worth Rs 36,369 crore has significant long-term implications for the economy that might prove inimical to the central bank's goals. First, such a move creates moral hazard among borrowers as it removes any incentive for repayment. An economy already burdened with the problem of bad loans can ill afford such a systemic undermining of its credit culture.

Second, it forces other state governments to either offer similar waivers or lose political ground. This can already be seen in Maharashtra and Tamil Nadu, where similar loan waivers will soon see the light of day. Third, it adds to government debt that will end up borrowing more and, in the process, crowding-out private borrowers. Such a scenario will hurt any growth prospects that the Indian economy possesses. Rising government debt will also add to the inflationary pressure that the RBI has been desperately trying to contain.

The Indian government needs to steer clear of such ill-informed policy decisions that only serve short-term political gains. A larger picture of reviving the economy in consonance with the RBI needs to be followed. To begin with, the government needs to urgently roll out the plan to tackle the problem of NPAs that it has been working on with the RBI. The issue of stressed assets has constrained transmission and credit flow, which has been hurting India's growth and also reducing the effectiveness of RBI's policies.

Also, as the RBI warns in its report, inflation needs to be closely observed and food prices need to be kept in check. This is a clear message to the government to curb inflation and inflationary expectations, especially through the supply-side, over which the RBI has no control. Finally, the government must be wary of the temptation of misusing fiscal policy for short-term gains, considering that it is the only policy tool at the economy's disposal in the near future.

All of the central bank's efforts since the last few years to manage liquidity in the economy and anchor inflationary expectations will be rendered useless if the government does not work in tandem with its policy actions. No amount of rate changes by the Monetary Policy Committee can help the economy in that case.”


The media and analysts had spread rumours that the new RBI Governor Urjit Patel toes GOI line and in the process RBI’s image has suffered. Recent months saw even books being released explaining how the credibility of the central bank is getting affected over a period of time. Relationship issues between GOI and RBI are getting magnified in books like “Dialogues of the Deaf” (TCA Srinivasa Raghavan) published recently.
RBI has taken the criticism unleashed, especially in the context of alleged lapses in post-Demonetization currency management in its stride. The approach of RBI to issues and how the central bank is playing its assigned role are being brought out on an ongoing basis in documents published by RBI. The first Monetary Policy Statement for the year 2017-18 and the Team RBI’s interaction with media following the release of the document give enough indication that RBI’s Think Tank (which now includes eminent members of Monetary Policy Committee) does its job with professionalism.
M G Warrier, Mumbai


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