The Precautionary RBI...

Last day the RBI again maintained a status-quo that a sect of the market forecast, however the majority was for a 25 basis points booster as the bank has already anticipated a lower growth rate due to currency replacement and cash shortage or money-supply disruption caused by the note-exchange and a lower inflation and higher unemployment, all pointed that the rate cut was necessary to improve the market-expectations which did not happen that has actually caused interest rates on bonds to go up which could further lower investment by increasing the borrowing cost and it would further lower investment and growth. The RBI has increased interest cost for the government too. The RBI’s actions are important for expectations and outcomes, only expectations crafting by the central-bank might affect agents or economic subjects’ actions which affect demand and supply and inflation and unemployment and the economic-growth, by the way of manipulating spending and savings, higher interest rate expectations or sudden change in commentary or signals like both ways management of interest rate may create uncertainty for the economic agents’ actions too, uncertainty for growth and growth expectation could too put investments on hold. There was a mixed commentary and not a rate cut even after low growth-rate expectations, which have done little to improve market conditions. It is not difficult to find the reserve or central banks of Advanced-Economies to cut rates to boost the stock-market when they go low to improve market sentiments, However, the market in INDIA has recovered from the downs post-note-ban, but the real-economy, lower or postponed consumption and higher unemployment due to negative shock to the construction and real-estate by cash-crunch and curb on the black-money, needs the incentive to increase investment and employment which the rate-cut could probably have provided. However, if the RBI had a rate-cut and then a comment to hike as and when required would have given the market a direction that a lower interest rate is warranted only when there are lower prices and conditions on the Inflation-Targeting-Framework (ITF) are met, like targeting a 5% inflation in the short-run. Lower borrowing cost when there is high unemployment and low growth and expectations coupled with low inflation at 3.41% would have improved growth and expectations and increase investment and lower unemployment; however the RBI might have also said that it would still follow its ITF. However, in the last rate-cut cycle during the Great-Recession-2008 the policy rates were cut as low as 4% which is lower than what the market expects the bottom, policy rate is still above 6%. We have the next Monetary-Policy-Review after two months, in April, hope delay brings clarity and not the disappointment to act late, when the external-conditions are not conducive, too…