Relook inflation target
This has reference to ‘What’s the ideal repo rate for India?’( October 27). The government needs to take a serious relook at the current 4+/-2 per cent inflation target for the monetary policy. The 2-6 per cent is too wide for a target and not helpful; it provides leeway to the central bank to not be vigilant enough in controlling inflation. The column says the RBI has a benchmark for keeping real repo rate between 1-1.5 per cent. What is the basis of this benchmark? Seeing from another perspective, an ideal inflation target should be the one resulting in a minimum output gap without overheating the economy. How to get to that number? It requires deep analysis, making appropriate assumptions and building alternative scenarios. The government should have wider consultations on this subject by bringing out a discussion paper in the public domain.
Effectiveness of repo rate
This refers to ‘What’s the ideal repo rate for India’ (October 27). With several dependant factors like inflation, money supply, exchange rates, fiscal status, etc., pulling the economy in different directions, the fixation of repo rate becomes a ‘perception’ based exercise rather than on any concrete arithmetic. Though it is construed as a reference rate for fixing the deposit and loan rates, banks cascade the changes effected in repo rates with a lag by which time it becomes less effective to serve any meaningful purpose. Also, banks follow different methods based on MCLR, base rate, repo rate, etc., to fix their own interest rates. Also, repo rates being dynamic in nature, banks applying fixed rate on deposits but floating rates on loans makes the whole rate fixing exercise unrealistic. An ideal scenario would be short and long term bond rates (dual rates) replacing existing repo rate as reference rates as it captures all economic indicators.
MSMEs need support
This refers to ‘Credit gaps persist in MSME, agriculture sectors despite banks meeting PSL targets’ (October 27). The MSME sector, which accounts for about 50 per cent of our exports, has not yet fully recovered from the post-pandemic shock and needs continued special attention from credit institutions. Agriculture, which bears the major brunt of climate change, continues to be the largest employer of the labour force and requires all the assistance that can be rendered by the banks.
This refers to ‘Picture imperfect’ (October 27). Keynesian economics is relevant for all developing and developed nations at all times. The English economist hit the nail on the head when he said that stimulating aggregate demand (consumption demand, investment demand, government demand and net export demand) is indispensable for achieving more employment, income and output in an economy. It is true that the real income of the people in India has declined, thanks to inflation. This in essence means aggregate demand has taken a beating. It is imperative that the state increases the aggregate supply or corrects the supply imbalances to rein in inflation and enhance the real income of the people. Increasing imports of essential goods in the short-run is not a bad idea.