The first thing to remember while looking at this monetary policy statement is that this is the first time that RBI is presenting a policy after its agreement with the government in inflation targeting and monetary policy setting.

That agreement concluded in February this year gives inflation targets from 2015 to 2017 and onwards. Inflation target is put at 6 per cent for January next, to further lower level of 4 per cent by next year and thereafter plus/minus 2 per cent. This has to be a durable inflation level for the economy and hence RBI and government have to work towards that jointly.

While elaborating on its parameters for setting monetary policy actions, RBI has stipulated mentioned several factors.

RBI is anchoring its policy to the progress made in government policies and implementation of these promised policies on a variety of fronts from “unclogging” supplies of key inputs like power and land, faster clearance and implementation of stalled projects or cutting down subsidies. This is possibly central bank’s answer to government setting inflation targets.

These are surely very important macro-economic targets for the government. But linking monetary policy directly to such broader goals every time could possibly make the process too diffusive. After all, central bank’s monetary policy is often is short term response to developing situation. Many of these stated parameters are more of medium or operational issues. Making monetary policy formulation contingent upon faster clearance of stalled infrastructure projects could defeat the purpose of monetary policy itself.

Similarly, if the central bank formulates monetary taking note of land as a key factor of production and ensuring its supply, that might drive it the realm of political wrangling. Should monetary policy kept stringent if opposition blocks passage of the land bill. What will happen if mining sector is bogged down by lack of clearances. A whole lot of questions will crop up possibly if the central bank has to take note of such diverse factors. Possibly some more thoughts be given to such issues.

Secondly, on price dynamics in the economy, the Reserve Bank is appearing to be getting into disaggregated price trends at too micro levels. While previously, wholesale price index was the broad measure of inflation, RBI has now moved over to consumer price index. Now, RBI appears to be tracking the sectoral and sub-sectoral price trends.

Reserve Bank is sticking to monitoring the sectoral prices in formulating its policy. In view of the falling prices of some goods, it will take into account the disinflation trends as well. Admittedly, looking at the price trends of select sectors is important. We have been witnessing a clear dichotomy in tis area for sometime now. While, the prices of food articles have been merrily rising, those for manufactured products were stable or sometime falling. In fact, even the WPI and CPI were going different way with WPI falling for several months when CPI was rising, mainly because of rising food articles prices.

If sectoral prices are becoming so much important, then low or falling manufactured goods prices for a long time now should warrant a more accommodative policy stance. On the other hand, some food articles inflation is still high, as the policy statement mentions, such as, protein rich foods. What will then weigh on RBI price evaluation? Disaggregated food articles prices or the sharp disinflationary trends in manufactured goods prices.

Once again, judgement and evaluation of the overall situation should be the real guide to action than mere technical pointers and indicators.

Thirdly, it appears as though Reserve Bank has taken advantage this time to address some medium term and longer term developments in banking and financial sector.

The first area appears to be the transmission of RBI policy initiatives. RBI has lowered policy rates twice recently. But the banks have continued with the same lending rates. If transmission does not take place, what fun is policy making. Towards this end, RBI is setting a time bound programme to shift over to a marginal cost of funds based determination of their base rates.

In this respect, RBI is seeking to give priority to the system of independent financial benchmarking. A new company set up by three industry associations in financial services should start functioning by May end and their indices are hoped to be used by banks for pricing their products. This approach should bring uniformity among banks practices in pricing their products.

These steps are important for future setting of RBI’s monetary policy as the RBI noted that accommodative policy moves have not been implemented by banks so far. Future monetary actions will first of all depend on how far the policy changes have been transmitted.

RBI has also taken a few critical regulatory moves and initiatives for strengthening the financial and banking system. These should help for future growth of our banks. (IPA Service)