Governor Shaktikanta Das addressing fifth bi-monthly monetary policy press conference.
Governor Shaktikanta Das addressing fifth bi-monthly monetary policy press conference.
(@RBI/Twitter)

The central bank seems to have been spooked by the food inflation. It’s decision to keep the repo rate unchanged at 5.15 pe rcent at a time when the economy is in the grip of slowdown seems to make little sense. It ought to have pepped up the sprits of market men by paring down the benchmark rate by at least 15 basis points to make it a full 5 per cent. Apparently, the monetary policy committee treated its brief about inflation far more seriously than the tightening grip of slowdown on the economy. Given that inflation was marginally over its assigned band of 4 per cent, thanks to a sharp spurt in food prices due to untimely rains, the MPC ought to have erred on the side of boldness. The reaction of the share markets to the dampner, especially when most pundits had predict a 25-basis point cut was not surprising. Lest the impression grow that a rate cut is key to growth, let it be noted sentiment does play a role in improving economic environment. At a time when credit off-take is hard to pick up, a marginally lower repo rate would have been reassuring for investors. But this was not the only surprise from the central bank. It also invited comment for drastically revising down its own projections for growth. Coming on the heels of a sharp decline in GDP numbers on the last two successive quarters, the RBI slashed its full year projection from the earlier 6.1 per cent to 5 per cent for 2019-20. Indeed, there are doubts whether even 5 per cent is attainable, given the slowdown in a wide swathe of the economy. The RBI Governor, Shaktikanta Das, was optimistic about some of the economic boosters announced by the government showing results soon. Clearly, the central bank expects the government to do its part since the monetary policy has only a limited impact on growth, especially when other factors are far from benign. The Centre has topped its target for fiscal deficit already, yet fresh pressures for handouts and freebies are mounting. Moreover, governmental spending by itself cannot grow the economy. Private sector has to come out of slowdown but how it can do so without a demand pick-up remains unclear. Rural demand has particularly slipped in recent months. Global economy is fraught with uncertainties with the two largest economies bearing down on trade. The real remedy lies in boosting domestic demand. Despite belated efforts to nudge movement, the real estate sector continues to remain stagnant. As the largest single consumer of cement, steel and building hardware, as also a huge employer of unskilled labour, it needs extraordinary attention for revival. A cut in stamp duty for property registration by various States can help sentiment. Easy availability of institutional credit too can be helpful. But, as Das told the press after the meeting of the MPC, despite a total 135 basis point cut in benchmark rate during the calendar year, banks have reduced the prime lending rate by a mere 44 points. Given the poor state of their balance-sheets due to reckless lending in the UPA decade, who can blame them? Meanwhile, former Finance Minister P Chidambaram, addressing the media after his 106-day imprisonment in a case of corruption, suggested that the Government was incapable of checking the economic rot. As always, he tends to have an exaggerated opinion of his own competence, though he needs to be reminded that the last time growth had tumbled to 4.5 per cent was under his watch. At the time, he had dismissed it as a temporary blip on the economic radar. His rebuke that the current regime is unable to retain experts such as Raghuram Rajan, Urjit Patel and Arvind Panagariya would have sounded credible had he not been constantly engaged in bickering with respective central bank governors. Chidambaram has the opportunity to weigh in on the economy but he cannot wipe clean his own mixed record as finance minister. Prices of onions and tomatoes last time they led to a public outcry was under the UPA. Out of power they all sound wiser, don’t they?

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