When commercial banks are not passing previous repo rate cuts it means liquidity is less than adequate given the NPAs and loss to the credit creation power... INDIA market real rates are way above in the major economies which has also made the INDIAn business uncompetitive... The RBI must commit expansion till unemployment rate reaches the target 5% (the natural rate and the potential rate)...
Unemployment management with the inflation target could bring consistency in the system... INDIA still needs to include low unemployment in its preamble... As long are there is unemployment in the economy there would be higher supply and low prices and higher demand and price expectations and spending... Moreover, there is also a natural real interest rate which neither inflates nor deflates the price level ie stable prices at full employment...
The govt spending has had been limited in this unprecedented situation therefore the fiscal deficit is not the main concern... The RBI has still ammunition left, the market real interest rates are higher than the reporate it means liquidity has been less than required to facilitate transmission to lower market rates... More money-supply also means recapitalisation, CRR and SLR could be used besides LTRO to reduce market real interest rates...
The govt must devote funds for the dams, reservoirs, irrigation and linking the rivers... Water harvesting could provide drinking water to scarcity areas ... Only 50% of the farms have irrigation facilities... Food inflation was behind the downfall of the UPA in the previous elections... Food has a higher weightage in the inflation basket which is a cost to the households, though lower prices increase real wages and demand and savings-investment and supply....
The commercial banks are marred with NPAs, in this the foreign capital could be used to increase investment by increasing FDI limit in the banks which could also lower competitive rates... Banks are holding the recovery in demand back which has also put investment and supply on hold... Rate cut would increase both demand and supply... when unemployment rate is more than normal...
Elevated inflation means the RBI won’t cut in the near term which means demand pressure due to near term bottom-out (interest rate) and low supply could increase spending which may reinforce higher inflation... Higher demand due to accommodative stance would further boost demand and prices and expectations, lower supply due to higher price expectations would again push the price-level... Higher prices mean higher inflation expectations in the near term...
If farm loans could be waived due to adverse conditions, business loans could also be raised or forgiven in this unprecedented situation of corona pandemic... This could provide much needed breather to the stricken business activity due to loss in employment and demand... Business loan waiver could help increase employment, investment, demand and supply and the economic growth, it would increase the ability for business expansion... One time bailout would help the recovery...
Expectations are self reinforcing, if people expect lower prices they delay demand and spending, which further lower prices, moreover supply would increase, again which would lower the prices and , if they expect higher prices they hold supply, which further increase the prices and would increase demand and price...
Nonetheless, any intervention to increase/decrease money supply would again reinforce the prices (too)... If there is unemployment and disinflation or deflation, more money supply would further lower prices by increasing supply and demand and if there is unemployment and inflation less money supply would further lower supply and increase prices and lower demand...
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