Today's Monetary-Policy-Review...

Both, the RBI governor and the half of the monetary-policy-committee are the government appointees, therefore it was obvious to expect rate-cut in the monetary-policy-review today amid government’s demand for rate-cut to boost growth. The government even before the new governor was in favour of rate-cut to boost demand, rural, urban and industry. Nonetheless, a lower CPI than in the past months was the prime cause of economists’ and analyst’s interest-rate-cut expectations in today’s review. The governor did not forget to mention the government’s measure to correct supply-side problems and ease inflationary-pressures. A good monsoon this year in a major-part of the country was also important for rate-cut and lower inflation expectations. Lower price of crude due to over-supply, and, also because of shale-oil production in the US and investment in renewable energy, in the future are also likely to keep CAD and fuel-subsidies contained, and lower inflation-expectations.

Many analysts say that the CPI as the RBI’s most favoured index for inflation might be flawed due to volatile food and fuel prices which have a little effect of monetary-policy and interest-rate movements, therefore Core-CPI which excludes food and fuel prices might be the right gauge for inflation. Many countries do use Core-CPI as the right-guide for interest-rate decisions. The RBI too might apply Core-CPI for interest-rate decisions.

A marked shift in the RBI stance than the past has been the change in the neutral or natural real-interest-rate to 1.25 from 1.5-2% in the Rajan’s regime... A lower neutral rate would increase investment demand; however there has been a weak relationship between real-interest-rate and investment globally due to weak global-demand... But, INDIA is not demand deficient and let us be hopeful that lower neutral-rate would increase spending... A lower neutral-rate would give more room to the RBI for interest-rate-cuts in the future.

Competition and liquidity are important for interest-rate-cut-transmission, not only in terms of more banks, but also along the lines of our last governor’s wishful thinking in terms of deepening the debt or bond-market - g-secs and corporate-bonds - by clearing way for foreign-borrowing through masala-bonds... Our new governor must continue liberalising the banking-sector and the loans by the foreign-countries...

Our government looked concerned over the banking sector saddled with bad-loans or NPAs for which the RBI might lower CRR for banks with high NPAs; it would help them to create loans... Lower reserve requirement could be used in troubled-times without impeding credit-creation and economic-growth...