According to the Harun Global Rich List, diversified RIL’s chairman and managing director saw his wealth decline to $19 billion, taking his global ranking down eight places to 17th. However, thanks to India’s inexplicably booming stock market this year even as its economy or GDP is down by over 15 percent in the wake of the pandemic, Mukesh Ambani’s net wealth has taken an unbelievably big leap by $22.3 billion since the beginning of 2020. In July, his wealth surpassed Warren Buffett’s to make him the fifth richest man in the world.

Aided by low bank rate that diverted savings from banks to the stock market and high diesel and petrol prices, India’s stock market has been booming through the last six months. The key stock indices totally ignored the country’s record-setting negative economic growth, fast growing price inflation and zooming central and state revenue deficits. The budget deficit of the union government is said to have already surpassed Rs. 6.62 lakh crore. There is a massive outstanding of central payment of GST share to states.

The RBI and the government must explain the purpose of keeping the bank rate at 4.5 percent when the retail inflation rate is hovering around seven percent and the fixed deposit rates of commercial banks are brought down to only around five percent. If the ‘real interest rate’ is the difference between inflation and the returns on FDs, the fixed deposit rates are witnessing a constant value erosion due to a nearly five-year high inflation. The inflation rate was as high as 7.35 percent for December, last year. It is RBI’s job to ensure that those saving with the banking system get a ‘real rate’ of interest which not only protects the savings but also acts as a catalyst to boost savings further. After all, savings are important for investment.

Interestingly, the monetary policy committee, headed by Reserve Bank governor Shaktikanta Das, emphasises that there is headroom for further action (meaning lowering of the bank rate), but the ‘arsenal’ has to be kept dry and used judiciously for promoting economic growth which has been hit hard by Covid-19 pandemic. It seems the committee chose to overlook the reason behind the unusual growth of the stock market, fall in the real value of Rupee in the wake of high inflation and low FD rates.

The committee seems to rely more on hope and less on the record of its predecessors. It is well recognised that any inflation rate in excess of four percent makes any central bank uncomfortable. Yet, RBI’s decision to leave the repo rate and reverse repo rate unaltered despite inflation breaching the 6 percent mark, is quite surprising. Notably, earlier this month, former RBI Deputy Governor Viral Acharya said inflation is higher than expected and the rate-setting panel should “respect” its core mandate of controlling price rise at the next week’s policy review meet. Acharya, an internationally acclaimed economist, said growth, which has dominated the decisions in recent times, is only a secondary objective for the Monetary Policy Committee (MPC) and termed it as a caveat in the contract between RBI and the government. “…you can’t alter the primacy of the legal mandate that is given to you. You have to respect that. That’s what democratic accountability is about,” he added.

It is an established principle of any monetary policy to target inflation under which a central bank follows an explicit target for the inflation rate for the medium-term and announces this inflation target to the public. It is assumed that the best that monetary policy can do to support long-term growth of the economy is to maintain price stability which can be achieved by controlling inflation. For this, the central bank uses interest rates, its main short-term monetary instrument. An inflation-targeting central bank will raise or lower interest rates based respectively on above-target or below-target inflation. The conventional wisdom is that raising interest rates usually cools the economy by helping to bring down price inflation.

Lower interest rates usually accelerate the economy, thereby boosting inflation. In the case of the RBI, it failed to recognise that its successive rate cuts did not help push the economic growth while inflation continued to grow over six percent. The bank rate is the long term rate (Repo rate is for short term) at which central bank (RBI, in our case) lends money to other banks or financial institutions. Bank rate is not used by RBI for monetary management now. It is now same as the marginal standing facility (MSF) rate.

Current bank rate is 4.25 percent. MSF is a special window for banks to borrow from RBI against approved government securities in an emergency situation like an acute cash shortage. The MSF rate is higher than repo rate. The present MSF rate in India is 4.25 percent. Going by the current trend of RBI’s monetary policy management, it appears that it is done more at the behest of the government than on sound economic principles. (IPA Service)