Monetary-Policy (INDIA) this week (June, 2017)...

The RBI is having its Monetary-Policy-Review on the 7^th of June, 2017 in the backdrop of demonetization, low inflation, higher unemployment and a lower economic-growth, and, those might form the basis of a dovish stance and soft commentary to continue with an accommodative monetary-policy instead of a neutral strategy and possible rate cuts in the future. The central bank is trying to take a perfect call on the policy rates and money-supply to moderate the market rates and increase loan growth and demand on the basis of data, which is difficult to happen, it thinks that it is difficult to adjust money-supply, interest rate and inflation too frequently, and it might be wrong, nevertheless it could communicate a rate hike when it is required, but low inflation in the data add consistency and credibility to the policy takes, the monetary-policy actions based on the incoming data would make it consistent and more credible, people should be able to understand the monetary-policy signals, it must not create confusion. The RBI is reading too much for too long and is procrastinating actions in the name of incoming data even when inflation and growth warrant a rate cut, it has made the monetary-policy difficult to be understood by the agents. Moreover, a higher real interest rate, because of higher nominal rate and low inflation, might lengthen recovery and deter achieving the potential growth rate, analysts and commenters still view 8 % real-GDP growth rate, a respectable for a country like INDIA with a higher population growth rate, to create jobs for all and reduce poverty. The RBI too might view it as normal without stoking overheating, inflation and loss in demand, it shall accept it as the new-normal in order to make the monetary-policy more effective in terms of its short and long-run objectives, controlling inflation in the short-term, however is important for the demand and growth in the long-run, but lower borrowing cost is also crucial for higher investment and supply to match demand. Notwithstanding, the commercial banks are still not in favour to cut back on the market rates, when NPAs and low income flows have restricted their balance sheets, commercial banks do not want to cut on the margins and profits, the banks probably are not in a position to lower rates due to low loan demand because of slow recovery and fear that they would also lose deposits. However, household savings in INDIA are at an all time high also because of higher inflation and inflation expectations, which might itself spell a correction in the market rates, if the commercials banks do not lead to increase demand for loans, higher real rates and savings might increase future rate cut expectations in the dynamic sense, which may take time, but if the banks try to increase demand it would bring equality in savings and investment and would keep interest rate stable, so far savings are high, but loan demand is weak which is responsible for weak recovery, low overall demand and low economic growth rate. Nonetheless, many claim that there is enough liquidity sloshing in the market, but question arises that then why banks are not passing the previous rate cuts completely even when there is an increased foreign competition and also competition from the bond market and the real rates are much higher which are holding on investment and demand. Probably, the issue of balance sheet slowdown, because of low loan demand due to high interest rates and NPAs deter the commercial banks from expanding because of inadequate liquidity, since they are reluctant to pass on the previous interest rate cut transmissions, if there was enough liquidity, banks had passed on the benefit to consumers and investors…