Effective action required...

The monetary-policy-review was along the expected lines because inflation has shown an upward bias depending on the food inflation which has become a permanent feature of the agriculture economy devoid of sufficient irrigation facilities. Every year prices of food items become a headache from the point of view of inflation, every season. Prices of one or two food items almost always deteriorate the household expenses. The government and the RBI are aware of the fact that certain food items are creating hurdle for economic growth because of delayed rate cuts, but they are largely ineffective in providing solutions. Whenever, economists propose imports it is sidelined by arguing in favour of domestic producers to protect them from foreign competition even in the face of skyrocketing prices and speculation. Sometimes some governments also decline to curb exports even in the case of higher domestic prices. But, it may work to keep prices stable and not curbing agriculturists’ profits altogether. It might try to gauge or expect demand through data in a period to facilitate supply in the same period. Prices are determined by the interaction of demand and supply. Imports are an important part of the supply chain and the price-stabilization fund must be used to curb too much volatility and ensure the price-stability which is also expected from the monetary-policy. Inflation is closely watched as an indicator of the health of the economy and investors, especially foreign investor, prefer low inflation because it would increase the value of investment in real terms and exchange rate term. Notwithstanding, inflation is also important to incentivize domestic investors by cutting down real interest rate (nominal interest rate minus inflation) which reduces the cost of capital and also labour because inflation would cut down real wages. Recent increases in inflation with a 125 basis-points rate reduction by the RBI last year have reduced the real interest rates, but the industry has failed to recognise that opportunity. The RBI has maintained that it would try to keep real rates around 1-1.5% in a dovish stance and 1.5-2.0% on a hawkish tone. If we calculate the real interest rate, it has come down to 1.15% which should catalyse investment spending but it has not. In INDIA people mostly track nominal interest rate as a cursor for investment. But probably the show stopper of economy, the construction, is constrained by bad assets and over-supply because of high inflation and higher interest rate and lower demand in the past. Nevertheless, house for all by 2022 is a giant step in the direction of keeping the real estate moving. It generates a lot of employment. The 7th pay panel would also increase demand. Bad assets/supply of the construction has become a drag on the economy’s demand which is only likely to revive with incomes and demand which the government spending might provide when the economy is still picking-up from a down turn. However, our RBI governor has made a loud pitch to stick to the fiscal-deficit and inflation targets. Downturns are good for spending and upturns are a moment for consolidation. If the government spending helps improve incomes during the downturn it would increase demand for the construction, too...