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    Good Afternoon and a warm welcome to the webchat with Subir Gokarn, Director of Research, Brookings India. The subject for the day is "RBI Monetary Policy review"



  • I


    I wish to ask that is RBI immune to political and india inc's pressure for rate cuts as Raghuram Rajan is suggesting ?


    The way to look at it is: suppose neither the business community nor people in government had said anything about what the RBI should do, would Dr. Rajan have done exactly the same thing? If so, then you could answer in the positive. I believe that this is the case.

  • V


    After Federal Reserve chairwoman Yellen comment do you really think that RBI should have cut rates?


    I think it was the right thing to do. Monetary policy decisions should be predominantly driven by domestic inflation and growth considerations. What the Fed does may have an impact on financial stability (although I think India is relatively insulated because of the low CAD) and other instruments are available to manage this.

  • G


    Recently, Mr. Rajan had made a statement that it would be better for India if the Fed raises rates in Septemeber itself as opposed to sometime during the end of this year. Could you please elaborate as to why and in what context did the Governor make that statement?


    I believe that I already answered this question.

  • D


    In your opinion how will the RBI rate cut effect the stock market?


    As you saw today, it offset the huge gap down opening, which arose from global pressures. Beyond the immediate impact, to the extent that it will provide some stimulus to demand, earnings expectations and, hence, valuations, should improve. But, it is only one factor in an equation that is currently quite complex, particularly with global uncertainties.

  • T


    Government officials are saying that inflationary pressures are at comfortable levels and the RBI must lower interest rates to spur economic growth. However, onion and pulses prices which features on the diet for a majority part of the population are significantly high.So is it justified to say that the current figures of low inflation is mostly due to base effects and inflation in reality is yet to reach the comfort zone ?


    I am repeating the point made in my first response: please do not mix up micro - onions and pulses - with macro forces. Yes, there are problems with those commodities, but monetary policy, whether by action or inaction, is not the instrument to solve them. The agricultural supply system has to take on that responsibility. That should be the subject of another chat!

  • D


    Business people are pressuring Governor to cut down interest rate (monetary policy), won't be it practical to pressurize Congress to help pass key bills to take care of fiscal policy mess?


    Once again, regardless of who is pressurizing the RBI, please work on the assumption that they did what they believed was the right thing to do. Yes, absolutely, business people need to engage with all parties to persuade them to do the right thing - not just right for business, but right for the economy and the country. And, I do believe that they are doing it.

  • S

    S . CHARI

    Perhaps this question is "out of context" .. I am yet to appreciate how these periodic tweaking of the interest rates impacts the middle income and lower income groups as they fight their way to make two ends meet. Why is it that, whatever the mandarins in the RBI and the Ministry do, the price of apples ( read any food item) just keeps going up and up? I do not think it is simple Economics 101 of supply and demand. Rather, it is a skewing of supply to a section of urban elite that wallows in cheap money and a distribution channel that benefits from this extravagance. When will our maid servant be able to afford apples or Horlicks or Cornflakes?


    A distinction has to be made between micro - commodity specfic - and macro factors. When you cite the example of apples, you are referring to micro factors and there it is a matter of demand and supply of apples. RBI's actions are meant to operate at the macro level - influencing aggregate demand and, importantly, inflationary expectations. I do hope your maidservant can afford all of those things if she desires them, but realistically, that is not in the domain of monetary policy. Her income needs to go up and those prices need to come down - this will happen if both her and the producers' productivity increase. That is the fundamental developmental objective.

  • S


    Sir i wanted to ask that even if the RBI goes ahead with a rate cut, would the benefits of it be passed on to the end consumer? The commercial banks have always been slow to reflect a rate cut in their lending. Only the corporates stand to benefit from this rate cut as they have the muscle power to negotiate lending rates. What does a comman consumer stand to benefit from it?


    There is always a transmission lag to be expected, but in the course of a few weeks, one should see a pass through. Muscle power may get you more bnefit, but that is not the only thing that matters here. On the average, borrowers will benefit. Look out for consumer and housing loans to be the first signals of this.

  • S

    S K NAIR

    Now that Dr. Rajan has obliged various lobbies clamouring for rate cut and assuming that the banks will immediately reduce their base rates (also deposit rates) similarly, and also assuming that not much policy action will be forthcoming from the government, how will the investment climate look like say six months from now? If the rate cut adversely affect the deposit collection efforts and the interest margin of the banks, won't this be an action in futility?


    Please don't look at this action as pandering to any lobby. It was the right thing to do under the current circumstances. Whatever else the government may or may not do, it is best if the central bank (or any other institution for that matter) do the right thing when it has the opportunity. As for deposits, when the real rate of return is quite good because inflation is low, I don't think banks are going to have a problem mobilizing them in these conditions.

  • D


    Why such a sudden surprise of three cuts i.e. policy rate cut, GDP growth rate cut and Inflation rate cut when the economic conditions are not so conducive for policy rate cut and the expectations of the market from an academician and a conservative professional Dr Rajan are otherwise?


    The only action here is the rate cut. The other two are downward revisions of forecasts. In fact, when both inflation and growth forecasts are revised downwards, the logical monetary policy response is a rate cut. So Dr. Rajan is living up to his reputation!

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