Early for CRR and MSS...

We have the next monetary-policy review on Dec 7, 2016 and the economists and analysts are hoping that the RBI could cut repo-rate by another 25 basis-points and some are hopeful to the extent that it would deliver a 50 basis-points reduction in the view of reduction in demand/supply and prices or economic-activity or economic-growth-rate in the face of demonetization and cash-crunch. However, it is quite clear that demonetization would lower demand and growth and prices in the short-run because money-supply and demand would be hit due to liquidity-crisis posed by the drive which is likely to recover with catch-up in the money-supply and demand for consumption and investment with time. Nonetheless, a good kharif-crop and lower vegetable-prices or inflation and inflation expectation, and low demand due to demonetization, are the factors that may push further lower interest-rate expectations which would increase investment-demand and growth-expectations. The interest-rate-cut expectation due to more deposits in banks is another factor that may increase interest-rate cut expectations. Lower borrowing cost when demand/supply has been cut by lower money-supply is likely to keep prices lower and increase demand and growth in the future. The increase in incremental Cash-Reserve-Ratio (CRR) requirement by 100% and the Market-Stabilitsation-Scheme (MSS) to mop-up extra liquidity in the hindsight of negative-effects, probably because it would retard the interest-rate reduction process by the RBI because the commercial-banks are already flooded with deposits and are cutting the savings-rate that might create uncontrolled swings in the mood of the economy. Too, much lower interest rate might increase inflation and inflation-expectations and hurt real-interest-rates and savings which might require tightening in the money-supply and lower growth-rate-expectations soon. It is quite rational to curb overheating expectations because the objective of the economic-policies is to achieve full-employment and price-stability with full-growth. But, inflation and inflation and inflation-expectations in the Indian-economy are biased lower also because of low food-inflation and inflation expectations and probably it is too early to think of tightening – higher incremental CRR and MSS. The policy-makers should let the public taste the sweetness of lower-interest-rate and more consumption and investment when prices and price-expectations are possibly on a downward-trend and the general income is fixed except the lower black-money demand. It is right and true that the size of the formal economy would increase after demonetization and lower-prices, the economy’s real-Gross-Domestic-Product (GDP) would increase… Lower prices and interest-rate would increase demand and supply and growth in the economy…