Money

Challenges facing India's monetary policy

K SrinivasanAugust 24, 2016 | 19:07 IST

The monetary policy announcement has its focus on inflation targeting for reigning in price stability. Other measures by the RBI on the monetary front include transmission of policy rates by the banking sector, asset quality at banks and structural reforms both inside and outside the RBI.

Bond yields will react mildly considering improved market liquidity and benign long term inflation outlook. In fact, bonds fell on Monday while the stock market ended marginally low in response to Urjit Patel's appointment as RBI chief, who, like his predecessor Raghuram Rajan, is unlikely to ease the monetary policy in the wake of inflationary pressures.  

Currency stability, growth stimulus, liquidity management have been the triumvirate of Rajan's policy statement. Inflation targeting, reliance on central credit information repository to bring about significant changes in the working of banks with reference to large borrowers - have all been brand Rajan measures.

Companies laden with debt and bankers saddled with stressed assets must be worried about the pursuit of bad loans and the clean-up of lenders' account books.

However, with CPI at 5.7 per cent-5.8 per cent in June-July and the likelihood of it touching six per cent-plus and above by August-September, one has to wait for the static policy repo and reverse repo rates, at 6.5 and 6 per cent respectively, to reign in price stability slowly by the year end.

By the time the fiscal year ends in 2017, inflation is likely to be contained at five per cent - with risk up-tilted to make the CPI come down to 4.8 per cent by 2018.

The bright spot is that all this is being sought to be achieved by the RBI, not through policy rate adjustments, but by pumping in greater liquidity via open market operations.  

With the advent of monsoon, hopes of recovery have started sprouting. Growth for full fiscal at 7.6 per cent to eight per cent can well be in sight by 2017-end.

The Kharif season is likely to be fruitful, which can further help cool inflation and especially create a conducive environment for a better food price index, though it may dampen during rains. But it will recover soon.

Preparations in the form of irrigation, purchase/storage and marketing reforms of grain and non-grain food to boost monsoon gains after harvest and decreased monsoon dependence by farmers during off-season will be important measures to take.

The central bank has forecast a lot of spending by government employees due to increased salaries announced by the 7th pay commission, which will result in an increase in consumption, hiked rents and food prices pushing up inflation further.

A worldwide deflation in the commodities market has been helpful for the country. Import bills are less due to the fall in oil prices.

Merchandise exports are looking up, but everybody's big worry is the global slow-down. China is recovering, while the EU is still struggling due to Brexit; Brazil and Russia may be above the danger mark, but the US and the UK still stutter.

The immediate prospects of exports look grim. Net foreign exchange acquisition in this fiscal is still to pick up. Currency circulation with the public will be increasing, particularly with the state elections coming soon.

Our fiscal and monetary policy experts can't afford to be complacent and neither can we afford to take our legs off the pedals of reform for the next two to three years. The conservative predictions are that the end of the government's term will witness a clear economic growth rate of at least eight per cent, if not more.

Let us keep up the efforts for a better and continual reform phase, especially with the GST expected to unify all markets without boundaries and make it a one market, one rate economy.

Last updated: August 24, 2016 | 19:12
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