India has been in the state of health emergency since March 2020. The pandemic has wreaked havoc on people’s lives and livelihoods. The Government’s response has lurched from half-baked lockdown to various stages of unlock. The Government has announced various schemes and measures to mitigate the impact of COVID-19.
The most prominent is some mumbo-jumbo of “Atmanirbhar Bharat”. The people want immediate relief for their misery, the Government promises some far-fetched wonderland in a distant future. Anyways, the people know that the Government’s economic actions have never been anything more than inconsequential. Hence, after some time everyone, including the Government, will forget what “Atmanirbhar Bharat” was all about.
However, one aspect is of economic significance to everyone. That is the decision on the interest rate by the RBI. Ever since Shaktikanta Das has assumed the role of Governor at RBI, his primary and only action has been to reduce the interest rate under the pretext of inflation being benign/under control etc. In the garb of fighting COVID-19, he has undertaken savage interest rate reductions. For each of his cuts, he has cited the inflation within the lower/acceptable limits.
Inflation is rising
Monetary Planning Committee (MPC) charged with tinkering interest rate has a sole objective to keep the inflation within the 2-6% band. The entire frame-work of decision-making at MPC is supposed to be based on this solitary purpose. The Government/RBI may change the objective, it is within their purview. However, neither have they done so till date nor initiated any discussion.
With no formal change in the objective, the MPC has to remain true to the defined single point charter. The Government is not releasing the inflation data in full. The limited statistics being released shows that inflation has breached the 6% threshold. If all the relevant parameters get recorded and published, the inflation might turn out to be much higher. But, let’s focus on the 6% mark, which Government shows that the inflation has crossed.
Every time Shaktikanta Das has reduced interest rate (MPC being just an eye-wash unlike during the time of Urjit Patel), he has piously stated the low inflation rate as a fundamental decision-making criterion. Now, when the inflation is rising, why is he not acting? Why is the RBI Governor breaking the norm, which he claims to have followed dutifully till now? What has happened to the MPC frame-work?
It seems that inflation was just being used as a smokescreen to keep reducing the interest rate. Till now, fortunately for Shaktikanta Das, the inflation was within the prescribed band. Hence, he kept referring to it and kept reducing the interest rate. With inflation rising, he has no intention to refer to it any more. So, the very mention of inflation by RBI has been given a silent burial.
The economy has to be supported
Now, the RBI is raising a bogey of supporting the economy to re-start its interest rate reduction plan. Propping up the economy is, of course, the need of the day. Rather, it has always been the perpetual need for India. The only question would be, is the interest rate reduction the sole input to fire the Indian economy?
Shaktikanta Das has reduced the interest rate so many times. What has been the impact on the Indian economy? Each empirical data shows that with every interest rate reduction, the economic growth has further nose-dived. It is commonsensical that when only a single weapon keeps getting employed, it loses its potency. But Shaktikanta Das will never get this.
The people have to be supported
This is another argument used by RBI so that it can blissfully keep reducing the interest rate. It has conveniently forgotten that it has announced a loan repayment moratorium for 6 months. Now, RBI has asked the banks to restructure the loans. When there are no EMIs to be paid, how is interest rate reduction going to help? Whom is it going to help, in what way? Else RBI needs to admit that moratorium is another hogwash.
Why would RBI consider only helping those people who take loans? Why would RBI not consider helping those people who deposit money? RBI, under Shaktikanta Das, seems to be highly selective when it comes to choosing the beneficiaries of its actions. It does not consider the depositors as worthy of its support, at all.
Interest Rate Increase
RBI says that the inflation rise is transient. For that matter, why cannot interest rate increase be transient? If you have been given a certain objective, why would you not stick to it? Because, you only used it to serve your pursuit, if it does not suit you, junk it. You stop the pretence.
RBI will say that interest rate increase will not aid consumption or support the economy. Inflation is rising, that itself can be taken as proof that RBI’s action has yielded results. People are now spending, so inflation is up. Now, does RBI want run-away inflation or what?
Forget it. There is no point in coming up with any logic when the pronouncement is pre-decided. Under one pretext or the other, the one job hit-man has to reduce the interest rate and he will do it, nonetheless. What help does it serve to Indians or Indian economy is not a question to be answered.
After all, the share-market has to be propped up or not? The supply of easy money has to be continued or not? The people have to be shorn off their savings and be mindless slaves to consumption or not? COVID-19 be damned.
3 cheers to the RBI under Shaktikanta Das.