X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Monetary Policy Imperatives for the Common Person - Outside View by S.S. TARAPORE
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Monetary Policy Imperatives for the Common Person
May 22, 2014

A new government is on the anvil and the hopes and aspirations of the masses would need to be given close attention. If there is one issue of overriding concern it is inflation. There is unanimity that inflation must be tackled but unfortunately, the wide body of policymakers, politicians, civil servants, opinion makers economists, analysts and industry all believe that the solution to inflation is growth and that a tight money policy militates against growth and thereby causes inflation. It is argued that food inflation cannot be tackled by monetary policy.

The Urjit Patel Committee Report

The Urjit Patel Report on Strengthening the Monetary Policy Framework has provided yeoman service by taking an unequivocal stand that the first step is to shift the monetary policy indicator to the Consumer Price Index (CPI). The criticism of the Report is that food items have a 50 per cent weightage in the CPI and that the RBI by focusing on the CPI is using an indicator it cannot control. The critics miss the point that the CPI better tracks the consumption pattern of the masses. Moreover, it is not generally appreciated that food inflation invariably degenerates into generalized inflation. Generalized inflation is, and always is, a monetary phenomenon and the right instrument for tackling inflation is monetary policy. Of course, critics of monetary policy will no doubt resort to meaningless labeling of such an approach as 'monetarist'. In India, there is a twisted understanding as a tight monetary policy is identified as a 'monetarist' approach. To earn the label 'monetarist' the RBI would need to limit the expansion of money, at the present time, to say 5 per cent per annum. Given the 13-14 per cent annual monetary expansion at the present time, the RBI just does not qualify to be considered as following a 'monetarist' policy.

The Inflation Targeting Debate

Critics of the RBI argue that it is veering to inflation targeting and that such an approach is being discarded the world over. The Urjit Patel Committee has set out that inflation should be kept within a rate of 8 per cent by January 2015 and 6 per cent by January 2016. Thereafter, the inflation rate should be maintained in a range of 4 per cent+/- 2 per cent. The criticism of the Urjit Patel Report, if at all, should be that the range for inflation set out in the Report is too permissive. But none of the critics of the RBI have taken such a stance in the past and none of the critics argue today that the RBI monetary policy has not been tight enough.

Relevance of Real Rates of Interest

To assess whether monetary policy is appropriate it is necessary to look at real rates of interest i.e. nominal interest rates adjusted for inflation. The latest CPI for April 2014 shows a year-on-year inflation rate of 8.59 per cent. As against this the policy repo rate is 8 per cent (i.e. the rate at which banks borrow overnight from the RBI against the collateral of government securities). Again, the term-repo rate, generally for 14 days, ranges up to 8.5 per cent. Given the present inflation rate, the RBI policy rates are negative or zero. As such, the criticism of the RBI should not be that monetary policy is too tight but rather that it is not tight enough.

Who Does Inflation Hurt ?

It is incontrovertible that inflation hurts the weakest segments the most and hence the best anti-poverty programme is the control of inflation. There is no trade-off between inflation and growth in the long-run and even in the short-run such a trade-off is doubtful. The anti-RBI lobby, which pressures for an easy monetary policy, is chasing a mirage. All that such a policy would do is to hurt the poor. If hurting the poor is a sin, advocates of an easy monetary policy are the sinners of society. I do not tire of repeating the words of sage economist Professor P.R.Brahmananda: "Not caring about inflation is like going into battle without caring for the wounded, the dying and the dead".

What Should be the Stance of RBI on June 3, 2014?

Shortly after the new government is formed the RBI monetary policy will be announced on June 3, 2014. If there is an avalanche of capital inflows, the RBI should reduce RBI accommodation and undertake outright sales of government securities. Governor Rajan deserves to be lauded for making it clear that the interest rate is set by him and for sustainable growth we have to bring down inflation.

As Jiddu Krishnamurti said: "If we can really understand the problem, the answer will come out of it, because the answer is not separate from the problem"-(Thought for the Day, Free Press Journal May 12, 2014).

Please Note: This is a Syndicated Column.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Monetary Policy Imperatives for the Common Person". Click here!

  

More Views on News

What They Forgot to Tell You About Sensex at One Lakh (Smart Contrarian)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

Jun 10, 2017

Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

4 Things To Do When You Are Not Able To Pay EMI (Outside View)

Feb 22, 2018

PersonalFN lays down simple steps to take if you find paying EMIs difficult.

This Investor Lost US$ 444 Million! How You Can Avoid the Same Blunder... (The 5 Minute Wrapup)

Feb 22, 2018

Here's how you can minimize losses if you have invested in the wrong company...

Is This the Most Absurd Government Agency? (Vivek Kaul's Diary)

Feb 22, 2018

Is this government agency doing the job of sounding an alarm if the financial system were ever in danger?

More Views on News

Most Popular

The Foundation for Sensex 100,000 is Laid(The 5 Minute Wrapup)

Feb 17, 2018

Top three reasons for Tanushree's presentation at Equitymaster Conference to be centered around a possible 30% correction.

The Era of Easy Money is Coming to an End. What Happens Now?(Vivek Kaul's Diary)

Feb 9, 2018

The easy money policy of the Federal Reserve of the United States, which drove up stock markets all over the world, is ending, with the Federal Reserve looking to shrink its balance sheet.

The Markets Want Your Money. Don't Give It to Them.(Smart Contrarian)

Feb 9, 2018

MFs are having a gala time taking money from over-eager investors and funneling it into equities. Smart investors, though, know better than to do that.

The Big Gamble(The Honest Truth)

Feb 15, 2018

Once you accept the fact that elections are round the corner and that this budget is geared to reach a 40% target, everything makes sense.

NPAs Set to Rise Further with New RBI Rules(Chart Of The Day)

Feb 15, 2018

The RBI overhauls bad loan framework. Banks may come under additional pressure due to rising NPAs and increased provisioning.

More

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Feb 22, 2018 (Close)

MARKET STATS