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  1. RBI right in adopting a wait-and-watch policy for now

RBI right in adopting a wait-and-watch policy for now

The demonetization of Rs 500 and Rs 1000 notes has no doubt added to the uncertainties in a big way and the Monetary Policy Committee has done well by keeping the policy interest rates unchanged.

By: | Updated: December 7, 2016 4:27 PM
The encouraging point for the government though is the RBI’s view that, “If the impact is transient as widely expected, growth should rebound strongly”. The encouraging point for the government though is the RBI’s view that, “If the impact is transient as widely expected, growth should rebound strongly”.

santosh-tiwari-sThe demonetization of Rs 500 and Rs 1000 notes has no doubt added to the uncertainties in a big way and the Monetary Policy Committee has done well by keeping the policy interest rates unchanged.

Reserve Bank of India’s (RBI) decision to ‘keep the policy repo rate under the liquidity adjustment facility unchanged at 6.25%’ clearly shows the predominant view in the Monetary Policy Committee (MPC), that it is better to first understand the impact of demonetisation of Rs 500 and Rs 1000 notes and then take a decision on the interest rates.
Pointing out that the bi-monthly policy announced, today, was ‘set against the backdrop of heightened uncertainty’, the review said: “Globally, the imminent tightening of monetary policy in the US is triggering bouts of high volatility in financial markets, with the possibility of large spillovers that could have macroeconomic implications for EMEs.”

But, the real clincher for the status quo, even though there was expectation of a 25 basis points repo rate cut, has been the demonetisation-led uncertainties.

“In India, while supply disruptions in the backwash of currency replacement may drag down growth this year, it is important to analyse more information and experience before judging their full effects and their persistence—short-term developments that influence the outlook disproportionately warrant caution with respect to setting the monetary policy stance,” the apex bank review statement outlined.

The encouraging point for the government though is the RBI’s view that, “If the impact is transient as widely expected, growth should rebound strongly”.

That, however, is not what is expected to be visible soon and food inflation along with crude oil prices and financial market turbulence remain the pressure points to be watched and tackled.

A clear direction for the monetary policy obviously will have to wait for these factors to play out fully, and the RBI has done well by maintaining that, “…. it is appropriate to look through the transitory, but unclear effects of the withdrawal of SBNs (specified bank notes) while setting the monetary policy stance”.

The government will have to remain satisfied with the RBI’s retaining the accommodative policy stance for now, and work towards expediting measures that will ease pressures on the businesses due to the demonetisation.

While there may be differences of opinion about the actual impact of demonetisation on the economy and growth, there is absolutely no doubt that it has impacted businesses and people adversely and the government has to show that these are just small irritants for a larger good by promoting digital transactions in a big way and catching those who have used different ways to deposit their unaccounted income kept in Rs 500 and Rs 1000 notes, in the banks.

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