RBI true to pattern, continues to prefer to be conservative and does not want perhaps to recognize the benign inflationary conditions and pass on the benefit by reducing the policy rates very badly needed by the economy for a psychological boost at least .The reasons adduced by RBI do not sound very convincing as the inflation expectations in an economy where agriculture is always a gambling on monsoon cannot be favorably predicted to perfection even though the monsoon deficiency is only around 3 % as of June. The transmission of policy rates reductions out of 0.75 % effected during this year has been only 0.30 % is a known phenomenon in Indian banks thanks to their poor capital base compared to the ever increasing bad loans, their compulsions to adhere to preferred credits as dictated by the government, mobilize deposits at a higher rate than that is permissible because of a competitive environment created by the Government offering better rates on some of the savings instruments, provide adequate credit support to the government through the SLR route which incidentally is more safe and liquid. Added to it the threat from the external environment particularly the Federal Reserves moves and not so conducive euro economic environment. Perhaps RBI may have a strong message to the Government that more needs to be done administratively to improve the supply chain to reduce the food prices, to remove the other constraints to improve the productivity both in agricultural and industrial areas which are more affected not by inadequacy of credit. However, the lack of coordination and understanding between the Government and the RBI is very much visible in the RBI’s approach to over all policy stance is what the Bimonthly Policy review reveals.
Dr T V Gopalakrishnan
(Reaction to the Monetary Policy review.)
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