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RBI adopts neutrality
It will be difficult to predict how markets behave when retail inflation is unrelenting in the post-demonetisation scenario
ActIT Jammu, Projects, Java,, C# Training Jammu
For the first time in six meetings during the current financial year, the Reserve Bank of India (RBI) had adopted a neutral stand on change of interest rates marking a shift in its policy. The newly constituted Monetary Policy Committee (MPC) of the central bank has kept the interest rates unchanged and allowed itself more time to make an assessment how the effects of demonetisation on inflation and Gross Domestic Product (GDP) play out in near future. In fact, the ripple effect of withdrawing high value currency notes announced by the Prime Minister Narendra Modi unilaterally on November 8 last year is yet to emerge from the markets despite forecasts that Indian economy has hit all time low point. The decision of the RBI on interest rates comes close on the heels of Modi telling the Parliament that the central government's move to withdraw high value currency notes had been undergirded by the premise that the Indian economy was doing well and the decision was taken at the right time. But this view of the centre has been challenged by the opposition political parties and the experts on many counts besides being described by economic watchers as the most despotic on the part of the NDA-government. The after effects on some of the sectors are yet to be worked out by the economic bodies across the country while agriculture and rural economy have been worst hit. The financial autonomy of the individuals has been robbed by the government, which is considered as the guardian of the state exchequer wherein the contribution of every citizen matters. Moreover, the hard-earned money of the common masses has been controlled by the powers that be instead of the earning hands, which should have control over their spending. The emphasis of the RBI for caution on demonetisation and replacement of the old currency notes in the market suggests that not only has the Indian economy suffered short-run disruptions but also that the long term impact may be far more enduring and very difficult to predict than anticipated. The policy statement issued by the MPC also projected the second successive downward revision in economic growth as measured by the Gross Value Added for the current year ending in March, with the pace of increase in GVA now forecast at 6.9%, from 7.1% in December and 7.6% prior to the November demonetisation. It may have to be revised further in the months to come in view of the downward economic outlook as expected.

Another important factor that has been ignored by the RBI and other financial institutions in India is the inflation that has not relented in the domestic markets. It is not only worrisome but also pinching the pockets of the common masses due to the wrong policies of the central government in the past one year or so. Apart from this, both the outlook for inflation and international uncertainty are also causes for concern, according to the RBI. The MPC overseeing monetary policy, flagged the risks that global inflation and a strengthening US Dollar pose to domestic price rise. Specifically, the central bank is worried about the 'unyielding' nature of core retail inflation, which strips out food and fuel costs, and has been stuck around 4.9% since September, mainly due to stickiness in price gains for housing, health, education, personal care and household services. The MPC reckons that the "persistence of inflation excluding food and fuel could set a floor on further downward movements in headline inflation and trigger second-order effects" that, when combined with hardening international crude oil and base metal prices and exchange rate volatility. The volatility in the crude prices in particular is likely to prove all calculations wrong on the import bill putting further pressure on retail inflation. It could have the potential to threaten the RBI's baseline inflation path of 4.5% to 5% in the second half of 2017-18. And ironically, were the effects of demonetisation to wear off quickly, vegetable prices, that had softened on the back of distress sales of perishables, could potentially rebound, posing another risk to the central bank's inflation outlook. The RBI has summed it up at the post-policy briefing, the RBI has plumped for prudence and flexibility. It will be interesting to watch how the markets behave in the months to come when new initiatives of the centre take shape in the post demonetisation process.

News Updated at : Monday, February 13, 2017
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