It comes as no surprise that the Monetary Policy Committee (MPC) has chosen to keep rates unchanged, given oil prices falling sharply (from $85 a barrel in early October to below $60 a barrel by end-November), capital inflows picking up and the rupee appreciating over the last month. However, what is disquieting is its remarkably sanguine account of the state of the economy, which does not chime with second quarter growth figures. Growth for 2018-19 has been projected at 7.4 per cent and for the first half of 2019-20 at 7.5 per cent. The MPC statement points to an increase in capacity utilisation, a pick-up in investment activity led by the government, a rise in exports and improved bank credit offtake at higher rates than nominal GDP growth. Corporates are expected to improve their revenues as a result of retreating commodity prices. As for inflation, a forecast of 2.7-3.2 per cent for the second half of this year and 3.8-4.2 per cent for H1 of 2019-20 seems decidedly benign, and could even prompt some to say that it points to a tepid demand environment. The liquidity situation, it asserts, is comfortable in a general sense, although some NBFCs would argue otherwise. The question that, of course, arises is: If bank credit, liquidity and investment are doing well, why is the Centre all worked up about small and medium industries being deprived of credit?

The fact of the matter is that credit growth from public sector banks to industry has stagnated, while retail lending by private banks in particular has picked up. A dip in agriculture output, along with an uncertain global environment in view of the ongoing trade war, may continue to hold back growth. Given a situation of low inflation, “moderation of rural demand, subdued growth in kharif output, depressed prices of agricultural commodities and sluggish growth in rural wages”, it is not clear why the MPC has opted for a stance of “calibrated tightening” over a “neutral” one. This once again raises questions of whether the inflation targeting framework should be reviewed. It would appear that the tightening stance is meant more as an encouragement to portfolio investors in debt than anything else. The Centre would be wary of another episode of rupee depreciation as the general elections draw near. With public sector banks, which account for two-thirds of loan portfolios, having turned off the lending tap in an atmosphere of regulatory upheaval, the onus rests on the government to keep the wheels of the economy moving.

For the upcoming board meetings, the Centre and the RBI should debate their respective roles and responsibilities. The RBI needs to take a hard look at its US Treasury investments (about $150 billion), which are losing value as their yields climb, and consider investing more in gold. This could address liquidity concerns. For now, the debate on growth and inflation resembles an echo chamber.

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