Monetary Policy at the crossroads

Monetary Policy at the crossroads

“Monetary policy at the crossroads”(Business Line,July2) brought out some stark realities on issues inhibiting the influence of monetary policy on determining the interest rates on bank loans. The wholesale price index and consumer price index do not move in tandem .


Monetary policy which aims at facilitating economic growth and maintaining price stability often tends to ignore retail prices perhaps expecting the consumer price index to fall in line with the whole price index. This seldom happens as the variables influencing WPI and CPI are at total variance.


The factors influencing CPI have to be identified and need to be suitably factored into the monetary policy. Expecting bankers to take into account the divergence between WPI and CPI while reducing interest rates is neither feasible nor practicable.


The fact that depositors and not the shareholders are the real owners of the banks is well illustrated. That depositors subsidise the borrowers and good borrowers subsidise the bad borrowers are ground realities and it is time the rates on deposits and lending are arrived at on a realistic basis .


The system of making banks lend at concessional rates to exporters and small enterprises irrespective of their earning potential and profitability makes the fixation of BPLR rates unrealistic.


It is also necessary to have a bench mark rate of interest in the economy to influence various other rates. Monetary policy has to necessarily recognize the inhibitions prevailing in the economy and the banking system for its effectiveness in influencing economic growth and price stability .

( This has appeared in Business Line on 4th July , 2009).


Dr.T.V.Gopalakrishnan