Ahead of the curve :: On MPC's policy perceptions

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MPC’s policy perceptions
This refers to your editorial “Ahead of the curve” (BS, August 2) and the media debate on MPC’s policy perceptions that followed. Your perceptions about the context of interest rate hike look very realistic. The media debate that followed the Monetary Policy Announcement makes one doubt as to how many of those responsible for follow-up support needed for RBI to show results read beyond the operational paragraphs in the Bimonthly Monetary Policy Statements issued religiously by RBI.
Banks have their own way of raising lending rates, irrespective of the real cost of resources or the guidance from the regulator. Since demonetization days, banks’ dependence on RBI for funding credit has not been very high. If their resources come from deposits, common man expects a rise of at least 10 basis point increase in deposit rates across categories of deposits, when the cost of bank credit goes up by 20 basis points. Is this really happening?
The reasons for MPC taking time to respond to market realities are many. This year, a fairly good monsoon has brought with it large scale losses also which will have an impact on government expenditure and market prices (read inflation). As most of the stakeholders including GOI, watch only for the end result, namely the change in base rate, of late, the responsibility of worrying about all factors affecting economic development is being shouldered by RBI. From climate change to the Fed Reserve’s policy stance, or political decisions affecting the health of the financial sector to pressures from FM for small change as ‘interim dividend’!
One wishes, responses to MPC’s bimonthly statements coming after two or three days’ in-house deliberations by expert economists and bankers are considered more seriously by policymakers and those who criticize rate hikes. More importantly, all stakeholders need to reconcile to the reality that Monetary Policy instruments will work only in a supportive environment, conducive to their operational efficiency, created by a healthy alignment of fiscal policy. A tall order, when uncertainties of election fortunes are looming large in the air.
M G Warrier, Mumbai


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