The RBI should not tell the truth, should it?

Against widespread expectation the Reserve Bank stunned markets by keeping interest rate unchanged at 6.25% at the Monetary Policy Committee meeting, couple of days back. Why? Because the RBI expects inflation to be at 5% at the end of this financial year, with a tendency to rise thereafter. Retail inflation was at 4.2% in October. The RBI blamed the rise in the price of crude oil which has risen to over $50 per barrel after the OPEC agreed a cut in output by 1.2 million barrels per day last week. India enjoyed an oil bonanza when the price of crude fell to $30 a barrel last year. The government increased excise duty on fuel by 140%, which increased revenues and allowed it to increase spending without increasing fiscal deficit. However, no one expects the price to go up very high because production of shale oil in the US will surge as prices rise. Though the price of fuel is a definite worry the rate of inflation should fall because demand has collapsed due to lack of currency. Sales of durables, like washing machines and refrigerators, are down 54% in November. Dining out is down 42% and even FMCG, which are essential items of daily use, like toothpaste, is down 22.7%. Overall consumption for October to December quarter is down 30%. We understand that no one buys a toothpaste with a credit card but why has the sale of cars come to a halt? To register any vehicle you have to show your PAN card so no one will be so foolish as to buy a car with black money. Moreover, with so much cash on their books banks are keen to give loans for buying cars at lower rates of interest. Large number of jobs may be lost, which will further depress demand. Some poor people are having to borrow at 20% interest, just to survive. Human behavior can never be predicted. In further proof that these brilliant people do not understand us the RBI has appealed to people not to hoard cash. They say that there is enough cash and people should withdraw only as much as they need. Very funny. People do not trust anything that the government or the RBI says. They know that shortage of banknotes is not going to go away in a hurry and no one wants to waste her life standing in queues. What if one of the machines breaks down? The government wants to convert the economy to a cashless one. This will increase tax collections and allow more help to the poor. But the poor do not want digital payments because if they are found to earn more than Rs 27,000 in one year they will not be entitled to benefits under the Below the Poverty Line scheme. So, demand is going to remain very low. Why is the RBI worried about inflation? Because it fears that the rupee is going to drop and that will increase the price of imports, especially oil. Trouble is that the RBI cannot say that. They will have to act surprised when it happens. Fun.