The Telegraph
Saturday , August 12 , 2017

Inflation cue to rate cull

- Mid-year survey a survival guide with an eye on the big picture and a focus on the specifics

New Delhi, Aug. 11: The government today pitched for cuts in lending rate as the rate of inflation was running low.

In a critical comment on the RBI's stand on the repo rate, the finance ministry said "tighter" monetary policy meant real interest rates in India were substantially higher than in comparable emerging economies. In its mid-year economic survey, the ministry argued that a faster monetary easing would help to deleverage corporate balance sheets and restore banks' profits.

Disinflationary pressures allowed the Reserve Bank of India (RBI) last week to cut its main policy rate - the first easing by an Asian central bank this year - by 25 basis points to 6 per cent, the lowest since November 2010.

Yet chief economic adviser Arvind Subramanian said the policy repo rate was still 25-75 basis above the neutral rate.

Although he didn't fault the RBI's new inflation-targeting framework, he did question the approach of its Monetary Policy Committee.

"Both expected inflation and GDP are subdued relative to their equilibrium levels," the survey said. "The conclusion is inescapable that the scope for monetary easing is considerable."

Even as the RBI resumed cutting rates, it warned inflation could accelerate to as high as 4.5 per cent in October-December. The survey, however, took the view that inflation, which cooled to a record low of 1.54 per cent in June, is undergoing a "structural shift". It said inflation had been overestimated more than 100 basis points in six quarters since the beginning of 2014.

It expects headline inflation to remain below the RBI's medium-term target of 4 per cent through to the end of March 2018 on the back of normal summer rains and the farm loan waivers.

"The survey said there would be disinflation of 4 per cent by March and food inflation would come down while arguing for the rate cut. However, this is debatable as transmission of rate cut has failed and credit-supply does not make an impact on investment," said N.R. Bhanumurthy of the National Institute of Public Finance and Policy.

During 2016-17, gross bank credit outstanding grew at around 7 per cent on an average, the Survey said. "The sluggish growth can be attributed to several factors, including incomplete transmission of the monetary policy as banks had not passed on the entire benefit of monetary easing to borrowers."

The Survey confirms that there is a need to substantially cut down the policy rates by the RBI and ensure its full transmission by the banks in the form of lower lending rates, Ficci said.

"The narrative still has not moved away from policy rate cut to admitting that fixing the problem of real sectors is equally important as investment revival is not a one way street," Sunil Kumar Sinha, principal economist, India Ratings & Research, said.

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