The Missing Data...

The government’s Chief-Economic-Advisor Arvind Subramaniam praised the RBI for the status-quo it maintained in the repo-rate which was unusual because normally the government has demanded rate-cuts to boost growth. But, the RBI disappointed everybody else who hoped for a 25-50 basis-points reduction in the key rates in the expectation of the demonetization-unfolding that is yet to become clear, say inflation and the economic-growth. The RBI expected only a 15-20 basis points reduction in inflation when it downgraded the economic-growth forecast to 7.1 from &.7.6 % because it is probably expecting data for November. The apex bank even though admitted a lower economic-growth and inflation in the aftermath of the note-ban, but unable to justify its course of action in the absence of the latest data. Probably the monetary-policy date might had been set post inflation numbers for Nov. However, if inflation falls below 3.5 % in the month the RBI would regret a missed opportunity to push the falling growth-rate. Nonetheless, the RBI has made it clear that it continues to expect inflation to have an upwards bias, but lower demand and growth expectations mean inflation could go down, but the question is how much to accommodate the real interest rate of 1.25 % which also depends on inflation which it thinks has still biased higher. The bank sees inflation target for 2017 to have upward-risks. De-monetisation experiences before had mixed effects on the economies in which they had been implemented. The RBI is clouded by uncertainty which might be a novel situation to deal with. It is true that the current phase of the transition from demonetization to re-monetisation in not much a liquidity- problem, it is mainly a problem of cash; people have money in their accounts, but not in the physical-form of currency notes which is the dominant form of trade for which consumption is being delayed. This is why the PM is pressing for cashless transactions to evade the problem of absence of notes which would also make transactions through bank-accounts a standard practice which would help to curb black-money transactions and fake-currency to finance terror. Nevertheless the RBI has proposed to end the incremental Cash-Reserve-Ratio of 100% to normal which might help to adjust the interest-rate spread between deposits and loans rates lower or help interest-rate transmission by the central-bank. The banks are full of liquidity and the bond yields are on a downward trend, deposit-rates have come down, but the RBI is probably wary of the nature of the excess liquidity, temporary or not. The RBI in today’s review did not expect too much lower inflation and the economic-growth after demonetization, however if inflation and growth falls too much in the recent data and the expected data we might not rule-out an out-of-date rate-cut by the Monetary-Policy-Committee which would be convenient when growth risks are on the downside…