Surjit Bhalla questions RBI on its policy stance, says no economic logic in not cutting rates in February

By: | Published: March 6, 2017 5:29 PM

Launching a scathing attack on Reserve Bank of India (RBI) and Monetary Policy Committee (MPC), Surjit Bhalla, Senior India analyst, Observatory Group on Monday questioned that why the rates were not cut in the Monetary Policy Review on February 8. "

Meanwhile, RBI governor Urjit Patel-led Monetary Policy Committee (MPC) kept the key repo rate unchanged in the first monetary policy review of 2017 and after Budget 2017.

Launching a scathing attack on Reserve Bank of India (RBI) and Monetary Policy Committee (MPC), Surjit Bhalla, Senior India analyst, Observatory Group on Monday questioned that why the rates were not cut in the Monetary Policy Review on February 8. “In October the inflation rates were 6.1,6.2 and 5% respectively and they cut rates. Then demonetisation happened on November 8th. One month after demonetisation, everybody agreed that there will be some pressure on prices. The RBI does not have any data, any economic logic to substantiate that why they shouldn’t be cutting rates”, he told BTVi. “The day RBI made the policy announcement and the change in stance from accommodative to neutral, first the market went down but then it fully recovered and ended in a positive. So the market said boo to the RBI,” he added.

“Why was the consensus of a rate-cut near universal for the December and February meetings? Because RBI had explicitly communicated at the October rate cut meeting that it was targeting a real policy rate of 125 basis points above its target inflation rate of 4%. Given the present policy rate of 6.25%, this means that if an inflation rate of 4.5% is considered sustainable, then the policy rate should be no more than 5.75%, i.e., there was space for at least 50 bps of rate cut at the February meeting,” he wrote in the Financial Express last week.

He further argued that at the February meeting, RBI had the following latest inflation levels: 4.2%, 3.6%, and 3.4% for October, November and December, respectively. Note that even the pre-demonetisation October inflation level of 4.2% (if considered sustainable) would have justified rate cuts up to 100 basis points. So, why no rate cut at the December (and February) meeting?”

 

Meanwhile, RBI governor Urjit Patel-led Monetary Policy Committee (MPC) kept the key repo rate unchanged in the first monetary policy review of 2017 and after Budget 2017. Interestingly, the committee said it decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out.

The MPC answer for no rate cuts and a move towards neutral from accommodative was provided by Governor Patel as “the committee felt that inflation, excluding food and fuel, is something that has been stubborn since September-October and has shown little sign of coming decisively below 5% (emphasis added).”

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