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Letters: Let the RBI decide

Inflation appears comfortable for now, but the RBI expects it to go up in the near to medium term due to unavoidable factors

Business Standard 

With reference to the editorial, “Welcome pause” (October 5), the slowdown may warrant a policy rate cut, but what’s possibly occupying the Reserve Bank of India’s (RBI) attention is why there has not been a quick transmission of its monetary policy actions by banks.
In this respect, the RBI expressed its dissatisfaction with banks in its earlier policy review on August 2. It had also hinted at setting up a core group to study the marginal cost of the funds-based lending rate for better transmissions.

Inflation appears comfortable for now, but the RBI expects it to go up in the near to medium term due to unavoidable factors. The monsoon, for example, has not been widespread this year, leading to some deficit conditions, which will affect prices of food items; the late rain spells trouble for kharif crops. The effect of the goods and services tax on prices of commodities will also have to be gauged.  
Global uncertainties and geopolitical risks can’t be ignored either. The RBI would want the situation at both the global and national levels to stabilise before it cuts key policy rates. It may not be a surprise if the RBI maintains status quo at its next policy review on December 6. By the end of the current fiscal, the maximum cut could be 25 basis points.
The RBI believes there is enough room for banks to cut their lending rates and pass the benefits on to borrowers; it would accordingly push banks in that direction. Gains achieved so far should not be allowed to slip out of the hand, rather, wait for an opportune time to strike.
The government is understandably anxious and expects the RBI to consider easing interest rates as this would help incentivise investment and thus promote economic growth. The assumption is that inflation will stay at a benign four per cent in the medium term; this is somewhat in contrast to what the RBI has been projecting. As the sole monetary authority, the RBI is in a better position to take the right decision at the right time. It should be allowed to do so without interference.
Srinivasan Umashankar   Nagpur
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First Published: Thu, October 05 2017. 22:33 IST