Consecutive rate hike by Reserve Bank of India: What is missing?


Reserve Bank of India has decided to increase the repo rate by 25 basis point to 6.5 % and reverse repo rate is settled at 6.25% and marginal standing facility rate at 6.75%. 








What does MPC say? 
The USA economy is growing mainly due to export while in the European Area, the political uncertainty is weakening the economy. Japan is gaining due to the consumer confidence and market sentiments. The emerging economies are not in good shape due to oil price and trade war. The Fed rate increase in June and anticipated of further increase is directing the capital flow to the advanced economy from emerging economy. The stronger dollar is reducing the price of the gold. Retail inflation is increased to 5% in June while headline inflation is increased to 4.6%. The increase in MPC will further affect the inflation. MPC expects the increase in MSP for Kharif crops and good monsoon will increase the demand in the rural area. The volatility in oil price, geopolitical tensions, fiscal conditions of center as well as state etc will affect the macroeconomic indicators of the economy.

But... 
Yes, it is true that due to the anticipation of the increase of rate in advanced economies, there is an outflow of capital. The stronger dollar is affecting the economy. On 4th April 2018, we have 424865 million dollars total foreign reserve while it is reduced to 405143 million dollars. The currency war is also creating the tension. But there are few points which should be observed. The weak rupees is not helping net export to improve. Export growth is increased in May and June 2018 but imports are also improved due to oil price. We are not receiving the benefits of the weak currency as we have the trade deficit with larger trading partner China which can’t be recovered by the trade surplus with the USA.

Second thing, the retail inflation is increased to 4.6% in April. It is increased to 5% even if the rate was increased in the previous meeting. So the 25 basis point hike in May 2018 didn’t help to curb the inflation. On the other hand, the core inflation reflects the growth of the economy. So if core inflation is increasing, then there should be a good growth. But this is also not happening. What does it mean? It means the inflation we are witnessing is a result of the rent-seeking behavior of the institutions which can’t be influenced by the monetary policies. The rent-seeking behavior is an activity of manipulating the policies to earn the profit which will not add any value to the economy. For example, autowala might charge you 20 Rupees more than the meter reading for no reason. The rent-seeking behavior is also not helping the economy.

Third thing, the positive impact of MSP is uncertain due to the lag which is present in the market. The lag between implementation and actual realization of MSP price might lead to an increase in inflation in the first stage and increase in demand by rural people in the next stage. This will only increase the inflation. Overall rather than expressing the concerned over the international problems, domestic problems must be addressed as they are harming us more. Instead of having tightening monetary policy, this can be done effectively through fiscal policy.

 (Continued)

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