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Cut the confusion | The Indian Express

Cut the confusion | The Indian Express

Cut the confusion

RBI has been accommodative: Just compare the real interest rate with the ‘natural’ rate

Written by Amartya Lahiri | Published: January 20, 2018 12:33 am
Between January 2015 and December 2017 the RBI/MPC reduced the repo rate from 8 per cent to 6 per cent.

Decisions taken by the Monetary Policy Committee (MPC) have recently attracted a lot of attention. The renewed focus on monetary policy has arisen due to a few factors. First, the last few years have been marked by slower GDP growth as compared to the growth rates achieved till 2014. Second, there is a general awareness that the room to use fiscal policy, which is the other standard policy lever, may be somewhat limited due to concerns about large fiscal deficits.
Between January 2015 and December 2017 the RBI/MPC reduced the repo rate from 8 per cent to 6 per cent. These rate cuts, however, have attracted criticism on account of being “too little”. The criticism is centred on the fact that the fall in the inflation rate over the past couple of years has implied that the real interest rate, which is the difference between the nominal (or rupee) interest rate and the inflation rate, has risen as a result. The argument then is that the growth slowdown, for a major part, is due to the high real interest rates induced by the stubbornness of the MPC in not reducing the repo rate. Indeed, the implied real rate since October 2016, based on the average of the year-over-year monthly CPI inflation rates, has averaged around 3.9 per cent.

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