Ball in Government's Court

This refers to your editorial Playing too safe (Business Line Dated 8/12/16). The monetary policy announced by the Reserve bank in the background of the demonetization of RS 500 and Rs 1000 notes has been very prudent and contrary to the expectations of the market, the banks and the Government. The Reserve Bank stood its ground and decided to pursue a conservative approach by keeping the policy rates unchanged and withdrawing the 100% CRR introduced to mop up the sudden liquidity faced by the banks thanks to sharp increase in deposits consequent upon the withdrawal of high denomination notes. RBI is right on its approach as the full impact of demonetization cannot be factored into this policy as things are in a fluid state to assess as to how the informal economy may get merged with the formal economy and to what extent the setbacks caused by cash withdrawals of a very high magnitude can be minimized through replacement of new notes, digitization of transactions and making the economic activities back in action in full swing. There is a definite time lag between the demonetization and remonetisation and this can have some short term pains to be offset by long term gains which cannot be fully accounted for in the present policy. The macro economic factors continue to remain stable and the RBI need not be unduly concerned at this juncture to effect policy changes. The rupee is some what stable, inflation is under control, the current account and fiscal deficit are very much manageable and there are possibilities of interest rate cut by banks themselves in the changed composition of their assets and liabilities thanks to demonetization. No doubt, there is a paramount need to stimulate the economy through enhanced demand for consumption, production, investment and fast pick up of credit for which more than the monetary policy, the fiscal policy can work wonders. RBI perhaps wants the Government to take the initiative in that direction which will also facilitate easy implementation of demonetization.

T V Gopalakrishnan

Bengaluru 76  

( Shortened Version of this letter has appeared in Business Line dated 9/12/16)