Tuesday, 5 December 2017

Why the government and RBI differ on policy rates

Why the government and RBI differ on policy rates

NEW DELHI: On Wednesday, the Reserve Bank of India (RBI) is slated to announce key lending rates at the end of its two-day long policy review meet. Analysts across the spectrum are fairly convinced that the central bank will maintain status quo as far as tweaking with rates is concerned. All but two of 54 analysts in a Reuters Pollsaid the repo rate would be kept at 6 per cent.



Repo rate- the rate at which the RBI lends to other banks- was last cut in August by 25 basis points (0.25 per cent), that being the only cut so far in 2017. The RBI had decided against any change in its last meeting in October.

The change, or lack of it, in the lending rates has now been a bone of contention between the government and RBI for a while. The government has been pushing the RBI to lower the rates in order to provide an impetus to sagging private investment sentiments. On the other hand, the central bank has been cautious keeping in mind, the rising rate of inflation, which currently stands at seven-month high levels. The rate of inflation which shot up to 3.58 per cent in October is still well within the RBI's target of 4 per cent. But the central bank will chart its course by its October projection that inflation may surge to 4.2 to 4.6 per cent in the six months to March 2018, driven by multiple factors including planned pay hikes for government employees.



Another source of RBI's discomfort is that core inflation, which excludes food and energy prices, has remained stubbornly high at around 4.5 per cent. Adding concern to the RBI's scheme of things will be the fact that prices of crude oil in global market and that of vegetables like tomato and onion have gone northwards in the recent past.

However, the RBI's likely decision of holding repo rate to current levels will not be to the best of government's interests. Latest data shows that the government's fiscal deficit has risen to 96.1 per cent of the full-year target by the end of October, as receipts lagged behind expenditure. Just a couple of days into this data, the government received yet another shock as the GST collection for the month of October fell to Rs 83,346 crore, the lowest since the rollout of the new tax regime, proving to be another dampener for the state coffers. A widening fiscal deficit and a low GST mop-up means that the government is left with little room to provide stimulus into the market, thus needing private investment to pick up
.


At a time when the economy is showing signs of recovery, the government will be keen to encourage investments in order to fructify the green shoots. In all probability however, the RBI will have its way as its stand vouches for long-term prudence. But with the RBI's next policy meet slated only after next year's annual budget, finance minister Arun Jaitley may soon have a few insights to share with Urjit Patel and his colleagues.

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