Letter to BS: RBI hikes repo rate to pre-empt inflationary build-up

This refers to your editorial “Ahead of the curve” (August 2) and the media debate on the monetary policy committee’s (MPC) perceptions. Your analysis about the context of interest rate hike are realistic. The media debate that followed the MPC announcement makes one doubt how many of those responsible for follow-up support read beyond the operational paragraphs in the bimonthly monetary policy statements issued religiously by the Reserve Bank of India (RBI).

The banks have their own way of raising lending rates, irrespective of the real cost of resources or the guidance from the regulator. Since demonetisation days, banks’ dependence on the RBI to fund credit has not been very high. If their resources come from deposits, the common man expects a rise of at least 10 basis point, and the increase in deposit rates across categories of deposits when the cost of bank credit goes up by 20 basis points. Is that happening?

The reasons for the MPC taking time to respond to market realities are many. This year, a fairly good monsoon has brought with it large scale losses, which will have an impact on the government expenditure and market prices (read inflation). As most of the stakeholders including the government watch only the end result, namely, the change in base rate, of late, the responsibility of worrying about all the factors affecting economic development is being shouldered by the RBI — from climate change to the Federal Reserve’s policy stance, or political decisions affecting the health of the financial sector to pressures from finance minister for small change as ‘interim dividend’.

One wishes that the responses to the MPC’s bimonthly statements, deliberations by expert economists and bankers are considered more seriously by policymakers and those who criticise rate hikes. More importantly, all stakeholders need to reconcile with the reality that monetary policy instruments will work only in a supportive environment. A tall order, when uncertainties of election fortunes are looming large in the air.

M G Warrier,  Mumbai

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