Sunday, November 30, 2014

Monetary Policy

RBI would be announcing its monetary policy on Tuesday (Dec-02, 2014). There is lot of hope and expectation of an early rate cut in this policy vs. earlier expectation of sometime in FY15.

Some valid arguments (half truth?) are in the play, let me try and summarise them here:

1) India's biggest import item (crude oil) has corrected significantly over past few months. In fact by over 30% from 100$/BBL to now 72$/BBL. Which shall bode well for inflation as well as current account balances and in part fiscal deficit.

Although, Indian fuel prices are now market determined to an extent, we haven't seen such drastic correction in domestic fuel prices. Can we draw 1 is 1 conclusion that 30% fall in global crude prices would result in 30% fall in domestic (petrol/diesel) prices? Answer is NO till now.

Would crude oil prices remain low for foreseeable future? No one can say. So what would happen, if the crude prices reverse their trend (which is quite possible)? Should RBI start raising rates again? Do we want to keep fighting this inflation menace all over again, just because OPEC didn't oblige us? Or do we want to tackle these keeping in view the long term realties?

2) Inflation has come off significantly is past few months, and currently real rates are in negative territory!!

Really? Are we that naive? Do we not care about our savers at all? Or we are just not able to comprehend basic mathematics of base effect? Yes, its true inflation has come off, even after accounting for the base effect. But who says its going to remain low? It wouldn't hurt that much if we wait a little while longer. Let Mr. FM deliver on his fiscal promises, let our parliamentarians do something worthy, before we bring out our knifes against RBI.

3) Economy is suffering because rates are high.
If rates are the only reason, then when rates were low before Dr. Rajan, why wasn't economy booming then? Economy is suffering, yes no doubt about that. Certainly high rates have a role in this. BUT, its not just the rates, there are multiple other factors to look at too.

Why do we keep punishing/questioning RBI, which is probably the only institution (except may be SC) who is doing its job! Remember the preamble of RBI? Anyone? There is job is maintain the value of Rupee in both domestic and international markets, that's it! i.e. manage exchange rate and inflation both in short run and in long run.

I do HOPE that Dr. Rajan doesn't succumb to the pressure tactics of politicians and businessmen!

Disclaimer: These are my personal opinions.