No logical justification in RBI’s policy stance: Surjit Bhalla

Mumbai, March 6 (IANS) Criticising the Reserve Bank of India’s policy decisions, noted economist Surjit S. Bhalla on Monday said there is no logic behind what the country’s apex bank has done in its last three meetings.

“There is no logical justification what the RBI has done in the last three meetings under Governor Urjit Patel and Monetary Policy Committee,” Bhalla, Chairman of Oxus Investments, said in an interview with BTVi.

“We have a problem where the central bank is not able to communicate or logically argue its stance,” he said.

Bhalla said at the October meeting, the RBI had reduced the policy rate by 25 basis point to 6.25 per cent while majority of market analysts expected no rate cut.

“In October, when they had the first meeting, they cut rates because they said the inflation was well under control and was trending downward. That was a surprise for the market,” he said.

Both in December and February, majority of analysts expected a rate cut of at least 25 bp but the RBI held rates steady and at the February meeting, the RBI had changed its policy stance from “accommodative” to “neutral”.

Bhalla said there was room for a rate cut by 50 bps.

Noting that the Reserve Bank had said at the October rate cut meeting that it was targeting a real policy rate of 125 basis points above its target inflation rate of 4 per cent, he said that given the present policy rate of 6.25 per cent, this means that if an inflation rate of 4.5 per cent is considered sustainable, then the policy rate should have been no more than 5.75 per cent, that is, there was at least 50 bp of rate cuts possible at the February meeting.

Bhalla said that when the RBI cut interest rates by 25 bps in October, the three preceding headline year-on-year inflation numbers which were available to it for June, July and August 2016, were 5.8, 6.1 and 5 per cent respectively.

The August inflation number just met the new RBI criteria and the RBI reduced the policy premium to 125 bp to justify the rate cut. If the RBI had not reduced its real target rate from 1.75 per cent to 1.25 per cent, the MPC would not have been able to cut rates, he said.

At the February meeting, the RBI had the latest inflation numbers for October, November and December of 4.2, 3.6 and 3.4 per cent respectively.

“Even the pre-demonetisation October inflation level of 4.2 per cent (if considered sustainable) would have justified rate cuts upto 100 basis points. So, why no rate cut at the December (and February) meeting?” he asked.

Asked about the motivation behind the RBI’s stance, he said: “According to minutes of the RBI’s MPC, two of the members did not vote for change in stance. There is amount of indication even within the MPC that something else is going on.”