The Goldilocks problem: Usha Thorat on Monetary Policy

The Goldilocks problem: What level of interest rate reduction would have been ‘just right’ for banks and the economy, is an open question...



Excerpts:
"Nevertheless, the inflation outlook gave space for the 25 bps action. The MPC has identified farm loan waivers and implementation of the pay commission award by States as possibly resulting in as high as 100 bps increase in headline inflation over the baseline. Also, vegetable prices are a matter of concern. Concerns have also been expressed by some market-watchers of the impact of rate cut on asset prices and liquidity chasing yields without factoring the risks.
They say that the RBI cannot be unmindful of the impact of sharper rate cut on asset inflation (in this context stock and bond prices).
Given the inflation-targeting framework adopted, it is to be expected that the RBI will focus more on ensuring durable inflation closer to the target level as that is what it is accountable for, than on allowing some risk to inflation for the sake of higher growth. In other words, there will always be a bias towards not cutting rates or cutting it only by “baby steps”."
My VIEW:
Whatever be the experts' view, RBI's base rates are yet to establish a 'living relationship' with real returns on savings and costs of credit or even prices (call it inflation, if that covers all these!). It has to be said to the credit of MPC that the committee's perceptions are now being transmitted more transparently, than in the past.
M G Warrier

Comments

Popular posts from this blog

NAVAGRAHA STOTRAM

THE SUNSET OF THE CENTURY

The King of Ragas: Sankarabharanam