Govt, RBI fail to arrest note ban fallout

The fact that the Reserve Bank of India has defied the all-round expectation of at least 25 basis points cut in the policy interest rate in the face of ample liquidity in the banking system is not as much of a dampener as its indifference to the pain and cost being imposed on the people and the economy because of the ill-conceived and the most unscientific way of unearthing black money through demonetisation of 86% of the currency in circulation. Just because people have been forced to return cash into the low cost current accounts and saving accounts (CASA), leading to a huge pile of deposits in the banks, does not mean the RBI can go around slashing interest rates even though its own estimates of lower Gross Domestic Product or Gross Value Addition, as it is now called, might have justified a rate cut. But then, as was pointed out in the latest credit policy statement, several key factors which could lead to inflation rising again, weighed on the decision of the Monetary Policy Committee (MPC) to apply brakes on lowering the lending rates. The principal factors, as enumerated in the policy document, relate to risks emanating from the US interest rates trajectory and base advantage on inflation disappearing in the next few months.

The RBI document has conceded that “upturn” in the prices of several items has been “masked by the easing of inflation on base effects.” In any case, prices of wheat, gram and sugar have been firming up, something the government can ill-afford ahead of Assembly elections in important states, including the crucial state of Uttar Pradesh. Insofar as a cautious stance on the rate cut is concerned, the RBI cannot be faulted; after all, it is a question of assessment and it is better for a central bank to be conservative despite conflicting pressures, even at times from the government.

But one had wished the same sort of conservative approach and steadfastness was shown by RBI Governor Urjit Patel, who seems to have toed the line for scrapping the notes of high value from November 9. Both the RBI governor and the Finance Minister Arun Jaitley cannot just get away by saying the disruption to the economy and pain to people was factored in before announcement of demonetisation. Even if they had factored in the disruptions, the government and the RBI have gone terribly wrong in assessing the gravity of the situation which is evident in the lives of ordinary citizens.  Central banks are not meant to be cheer leaders of the government in all cases; they must be watchdogs instead!