RBI Monetary Policy...

RBI has done nothing to improve expectations to increase slow spending and growth... except government spending which has a very space limited... Pause on rate cut would have almost no effect on growth except inflation expectations and low demand due to increased government spending which directly increases employment, demand and inflation without productivity gains... It is true that private spending is growing slow which public spending could cover, but for that too lower borrowing cost is important... At worst demand could increase with lower unemployment and increase supply which would contain the price level and increase real prices means more supply/demand/growth even after full employment, people would demand/supply which means more growth... Lower borrowing cost would also reduce unemployment increase economic activity or demand/supply, both through lower prices and increased competitiveness with sticky wages, lower cost of capital would increase its productivity and lower prices, in the absence of wage competitiveness...

Inflation expectations in the Monetary Policy are not supported by the tax side or measures taken by the Government due to low Corporate Tax and GST which is also likely to boost supply and demand and revenue due to lower prices, and, is based on adaptive expectations and not on rational expectations generated by supportive and growth oriented policies by improvement in productivity and competitiveness of the supply side to further increase investment and employment in the economy. The economy is on the glide path, in the words of Rajan who introduced inflation targeting, in terms of prices and on the flight path of demand and growth, and revenue expectations, there are still glitches and time to reap the fruits of a low, good and simple tax structure which could move within band to fine tune demand and supply, and increase growth.

The RBI expects higher oil inflation due to cut in excess capacity in the sector, but due to competition in the global oil industry it is little uncertain what the sellers could do when there is scope to increase market share by lowering prices in the presence of excess capacity which could increase investment and employment and profit due to increased demand for oil due to lower prices. The Shale oil is mainly responsible for excess capacity in oil which puts a ceiling on the oil prices because at higher prices investment and employment in the US would become more viable and would further add to supply and contain oil prices.  The Government has plans to imports Shale gas and Shale oil from the US at lower prices. Moreover, the Government has capacity to lower oil inflation due to shift from VAT to lower GST; it would help lower oil inflation and the economy wide transport cost and the general price level or CPI.

The policy makers decided for the MPC and inflation targeting few years back to increase the Government participation in rate setting through the committee and reduce the friction between the Governor and the Government mandate on the inflation targeting within a band which is targeting the upper side of the target, means more inflation and inflation expectations compared to the down side and low inflation and inflation expectations which means the committee has missed chances of rate cuts, lower the borrowing cost, increase capital productivity, competitiveness, investment, employment, supply/demand or the economic activity and growth to the country’s potential, and is stuck at seasonal inflation.

The RBI says interest rate is not significant for food inflation when informal lending and higher shadow rates have increased cost for the sellers and loss of commercial banks business due to low penetration in the daily retail market and rural economy. The lower borrowing cost would add to the sellers’ profits which could not take advantage of volatility due to capital shortage, even investors in the stock market could use Margin and Margin Plus or Flexi-Cash which is considered to be more risky than a business. Credit has hardly been easy to promote local business and dependent on money lenders.

The commercial banks often do not want to lose savings or deposits which is also a function of the general price level and lower inflation and are likely to increase deposits because of lower borrowing cost and debt and increase in actual business and household savings which means more investment employment growth. Lower borrowing cost and increased savings/deposits would further boost investment. In the run borrowing cost could go as low as zero nominal interest rate which would converge to zero natural real rate of interest ie zero change in the prices at the natural rate of unemployment or the non accelerating rate of unemployment or NAIRU ie the potential or the highest growth rate in the time frame.