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Home >Opinion >Quick Edit >Monetary policy can’t fight the covid crisis

Nobody should be disappointed with the Reserve Bank of India’s latest monetary policy revision. Or non-revision, if you like. Its stance remains "accommodative", which means a bias towards easing credit availability. But its key policy rate, the so-called “repurchase" rate at which commercial lenders borrow from the central bank, has been kept unchanged at 4%. Good. The country’s economy may be battered by the covid pandemic, but that does not mean that cheaper loans would help. Let's face it:The cost of money has little to do with the crisis we’re facing.


An interest rate is a price, and like all prices, it affects those who pay as well as those charge it. One cannot assume that a price can be lowered limitless, especially at a time when it is already below zero, technically, given that official inflation is around 6%, which is two percentage points higher than the repo rate and also higher than what most bank depositors get on their deposits.

Unfortunately, monetary policy has come to be seen as some sort of panacea for all economic ills. This is largely because of the monetarist revolution that began after Milton Friedman’s ideas and those of the Chicago school of economics gained ground in the 1980s. Policy responses in the economic domain began to centre around the cost of money. If growth slowed, rates were cut. And if inflation rose, they were raised. The limits of this approach have been exposed in recent years. Some analysts, however, think holding back a rate cut is good solely because it lets RBI keep its “powder dry" for cuts later. But unless inflation falls below RBI’s target rate of 4%, a rate cut later would not do much good either. We need to think afresh.

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