Keep guessing

By leaving the key rates unchanged due to a spike in global oil prices driving up inflation, the RBI’s monetary policy committee has disappointed loan takers, though the more urgent issue before people at large  is the shortage of currency, not its cost. Financial analysts who had expected a 0.25 per cent repo rate cut perhaps need more time to get used to surprises from the RBI and the government. Quick, unpredictable decisions are followed by equally sudden, swift amendments. This shows a leadership at the helm which is unsure and unprepared. The sudden CRR (cash reserve ratio) hike of 100 per cent was as surprising as the announcement of its proposed withdrawal.  

Also keenly awaited was the RBI’s reading of the effect of demonetisation on economic growth. Every Prime Minister and every Finance Minister have political compulsions to keep hope alive and paint a rosy picture of the economy and find plausible reasons if the economy ultimately lands in the pits. The RBI is under no such compulsion. In fact, RBI Governors have been known to assert their autonomy and resist pressures to cut rates. Because of its autonomy and non-aligned experts, people look forward to the RBI for an honest assessment of the economy. This time, however, the RBI’s GDP projection of 7.1 per cent growth may have to be taken with a pinch of salt. 

Being a party to the Modi government’s demonetisation decision and being partly responsible for the consequences of its botched-up implementation, the RBI may be underplaying the negative fallout on economic growth. The service sector, which has been the growth engine, has contracted. Joblessness, already bad, has worsened. There is a sort of consensus on the cash crunch weighing on real estate, infrastructure building and consumption-led growth. Yet the RBI has chosen to be overly optimistic. It was one of those rare times when the RBI Governor was expected to give the country an independent opinion on how good or bad things were and offer convincing remedial steps. Urjit Patel has not risen to the occasion.