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Editorial
RBI should act beyond rate cut
The central bank has reduced the policy rate cut while flagging multiple concerns on Indian economy
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The Reserve Bank of India (RBI) has opted to play safe by cutting the policy Repo rate by 25 basis points last week while nominally acceding to the clamour for softer lending rates. The Monetary Policy Committee's majority decision hinged on its observation that some 'upside risks to inflation have either reduced or not materialised', opening up 'some space' for accommodation. Specifically, the bimonthly policy statement refers to the significant slowdown over the past three months in core inflation - retail price gains excluding those for food and fuel. The foodgrains and petroleum products have witnessed some inflation which is a matter of concern for majority of the people in the country. It notes that the monsoon has so far been normal, and the initial roll-out of GST has been 'smooth' so far. Yet, the six-member panel has chosen to retain the 'neutral' stance, given that it expects the trajectory of inflation to rise from current lows amid an atmosphere of uncertainties. The factors deterring a more abidingly benign view for the path that prices are likely to traverse bear repeating, given the inflation-targeting remit handed to the MPC: the RBI's statement does just that. A conclusive separation of 'transitory and structural factors' impacting price gains remains elusive. Prices of inflation-sensitive agriculture products including tomatoes and onions are increasing. Pressures may be building that could spur higher animal protein costs for consumers all across the country. The implementation of farm loan waivers by some of the states and the 'tail risk' that the fiscally expansive measures could pose to long-term price stability that RBI Deputy Governor Viral Acharya referred to in June, continue to be significant. Though the Centre has already made it clear to some of the states that they have to generate their own resources for the loan waiver to the farmers, yet the economic outlook remains grim. And there is no clarity on whether and when state governments will implement salary and allowance increases following the Centre's implementation of the seventh pay panel-related hikes.

The MPC has acknowledged that there are moderating forces at work - a second successive normal monsoon that could check food costs and a stable international commodity price outlook - that could help keep the inflation trajectory favourable. On economic activity front, the RBI has flagged multiple concerns. A poll of business sentiment in the manufacturing sector shows respondents expect a moderation in July-September from the first quarter of the current financial year. Also, the high levels of stress that continue to be reflected in the balance sheets of both lenders and corporate borrowers presage the unlikelihood of any upward progress in new investment. With the underlying impulses for growth in industry and services weakening, the onus is now on the Centre and the states to take enabling steps, through policy measures and directed fiscal actions, to give a thrust for the revival of private investment. Surely, as Viral Acharya cautioned in June, it will serve nobody's interests if the rate reduction doesn't have 'the desired amplifier effects on the economy' and ends up only temporarily masking the true problems in the banking and real sectors. The RBI's suggestions to infuse investments in the key sectors for pushing up the growth in the country has had limited effect and could not achieve the targeted levels due to various factors. The biggest relief for the central government has been volatility in the international market of crude petroleum prices that kept the inflation on the lower side during the past more than one year. But the increase in prices of petroleum products in retail has not matched the dynamics of ups and downs in the international market inviting anger from the general public. It is for the central government to act on its own and show some way out for fueling the economic growth rate for improving the overall health of this sector in India.


News Updated at : Monday, August 7, 2017
 
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