It was only to be expected that the Monetary Policy Committee would hold the repo rate — the rate at which banks borrow from the central bank — at 6 per cent. Having committed itself to keeping inflation within 4 per cent, the MPC was expected to take a serious view of 3.6 per cent retail inflation in October. A reversal of five straight quarters of falling growth in Q2 also meant that there was no apparently pressing crisis on the growth front. So, the MPC’s statement on Wednesday, in fact, reads like a litany of anxieties on inflation. Fuel and food prices have indeed increased in recent months, with the latter expected to stay elevated owing to lower rabi acreage than last year. The MPC expects “inflation to rise and range between 4.3-4.76 per cent in the second half of this year, including the impact of increase in house rent allowance (HRA) by the Centre”. Many would ask, given the MPC’s track record on forecasting inflation, whether these are reliable. Bond market trends seem to suggest rising inflationary expectations as well; the gap in yields between short-term and long-term government securities has risen from about 30 basis points four months ago to 100 basis points now. The other concern implicitly voiced in defence of the status quo on rates, is the impending reversal of the rate easing cycle the world over, and its possible impact on the rupee in the event of a rising interest rate differential.

The point is not whether the MPC has erred in sticking to the status quo. There were perhaps good reasons to hold the line this time. It makes sense to resolve the NPA issue before expecting monetary transmission. Banks need to keep deposit rates attractive so that long-term savings are not depleted, impeding their ability to make long-term loans. There has been an exit of retail funds from banks to equities due to bank rates being unattractive. A cut in repo rates to spur lending would deter banks from reaching out to savers. The role of banks as long-term lenders cannot be replaced by CPs and NBFCs, even though these have stepped up their role; hence, it is important that banks be restored to sound health. They should be able to maintain lower net interest margins.

The MPC has not addressed growth issues, while maintaining its growth forecast for 2017-18 at 6.7 per cent. The economy remains demand-constrained, and needs a push either from fiscal or monetary policy. The MPC has trotted out predictable concerns over “fiscal slippage” and its inflationary effects. But it needs to go beyond being a drab inflation forecaster and do a dynamic analysis of the economy. Central banks the world over monitor job trends, but this does not figure in the MPC’s scheme of things. Trends in savings, investment and debt need to be placed in the public domain, as well as the MPC’s take on them.

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