Letters: Safe, but is it sound?

Apropos the editorial "Playing it safe" (December 3), on the eve of every monetary policy review statement by the Reserve Bank of India (RBI), the markets become agog with speculation about the possible changes in policy rate. But this time there was more speculation because of, among other things, the tacit indication by the finance minister that the economy, poised for higher growth, needs a monetary prod by way of a rate cut. If the policy rate is supposed to be an authentic signal to help economic agents anchor inflation expectations, then it needs to be realistic. Therefore, RBI has taken a prudent course to ensure that the signals of apparent mitigation of all supply side constraints would be sustainable in the short term to avoid any possible policy flip-flop.

In a bank-dominated financial system, a change in the policy rate will not have any significant bearing on the lending rate if the signal is not quickly taken into reckoning and factored in the deposit/lending rate fixation mechanism in place in banks - which, going by anecdotal evidence, does not happen quickly, more particularly when a rate cut is effected. A change in policy rate has no direct bearing on the balance sheets of the banks.

Biplab Chakraborty Kolkata

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