RBI'S OCTOBER MONETARY POLICY STATEMENT: RIGHT CALL

RBI'S OCTOBER MONETARY POLICY STATEMENT: RIGHT CALL

Saturday, October 31 2020

The position of the Indian economy continues to be difficult with the macro-economic situation deteriorating from twin balance sheet crisis to four balance sheet crisis: banks, infrastructure projects, real estate and NBFCs. Subramanian, et al (2019) cogently argued “India is now facing a Four Balance Sheet challenge—the original two sectors, plus NBFCs and real estate companies—and is trapped in an adverse interest-growth dynamic, in which risk aversion is leading to high interest rates, depressing growth, and generating more risk aversion. Standard remedies are unavailable: monetary policy is stymied by a broken transmission mechanism; large fiscal stimulus will only push up already-high interest rates, worsening the growth dynamic. The traditional structural reform agenda—land and labour market measures—are important for the medium run but will not address the current problems. Addressing the Four Balance Sheet problem decisively will be critical to durably reviving growth. Raising agricultural productivity is also high priority. And even before that, a Data Big Bang is needed to restore trust and enable better policy design.”

The position of the Indian economy continues to be difficult with the macro-economic situation deteriorating from twin balance sheet crisis to four balance sheet crisis: banks, infrastructure projects, real estate and NBFCs. Subramanian, et al (2019) cogently argued “India is now facing a Four Balance Sheet challenge—the original two sectors, plus NBFCs and real estate companies—and is trapped in an adverse interest-growth dynamic, in which risk aversion is leading to high interest rates, depressing growth, and generating more risk aversion. Standard remedies are unavailable: monetary policy is stymied by a broken transmission mechanism; large fiscal stimulus will only push up already-high interest rates, worsening the growth dynamic. The traditional structural reform agenda—land and labour market measures—are important for the medium run but will not address the current problems. Addressing the Four Balance Sheet problem decisively will be critical to durably reviving growth. Raising agricultural productivity is also high priority. And even before that, a Data Big Bang is needed to restore trust and enable better policy design.”

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