1 min read.Updated: 06 Dec 2016, 08:10 AM ISTAparna Iyer
A rate cut or even its absence is not as crucial as to what the monetary policy committee's thoughts are on the impact of demonetization
The monetary policy committee (MPC) will start its two-day meeting on Tuesday to discuss and vote on what the Reserve Bank of India (RBI) should do with its policy rates.
There are no ready solutions to the monetary shock posed by demonetization, which purged 86% of the currency (by value) in circulation. That said, a thread of clarity over growth and inflation has emerged over the days since Rs1,000 and Rs500 banknotes ceased to be legal tender on 9 November.
It is clear that the move will dent consumer demand and hurt growth over the remaining part of fiscal year 2017. Inflation is likely to ease because of depressed demand conditions, but a forecast on inflation is tricky as delays in the sowing of the rabi crop could potentially spur food inflation.
Nevertheless, the price situation looks under control if one considers the flexible inflation target of 2-6% for the central bank.
A rate cut or even its absence is not as crucial as to what MPC’s thoughts are on the impact of demonetization. None of the MPC members, including RBI governor Urjit Patel, have offered any insights so far on what demonetization would mean for monetary policy. The demand is not so much as to what the repo rate will be on Wednesday, but what MPC thinks growth and inflation will be six months or even a year down the road.
The statement detailing the resolution of the first MPC meet in October was a three-page release that packed in forecasts as well as an outlook endorsed by its members. While an encore is expected this time, for markets hungry for information, the MPC resolution needs to go beyond that. What would be vital are the forecasts for industry, agriculture and services.
The committee should risk being verbose rather than be terse in its resolution statement.
In the first statement by MPC after its maiden meeting in October, this column had argued that the commentary left a lot wanting.
The demand for communication has only increased manifold since then.