Banks have lots of money, but no one wants to borrow.

"The monetary policy committee (MPC) of the Reserve Bank of India (RBI) decided to leave the policy rate unchanged in its meeting last week," wrote V Anantha Nageswaran. Not just that, the MPC changed its bias from accommodation, which means it would be inclined to cut rates, to neutral, which means it could go either way. Naturally, there was huge disappointment, especially after retail inflation came in at 3.17% in January, lowest for 5 years. This is mainly due to a fall of 15.62% in vegetable prices and a 6.62% fall in the prices of pulses. Prices of all other food products went up. Soon after wholesale inflation came in at 5.25%, highest for 2.5 years, due to higher prices of fuel and manufactured goods. Last year wholesale inflation was negative while retail inflation was high, this year it is the opposite. It is probably impossible to control inflation in India. Why? Because wages increase by an average of 10% every year, which adds to manufacturing costs, and rents go up by 10% every year, which add to household expenses and result in demands for higher wages. The Supreme Court had suggested a 10% increase every 3 years but no one is listening. All politicians and business fellows passionately believe that low interest rates stimulate economic growth, regardless of inflation, consumer demand or financial savings. There was great jubilation when the new Governor of RBI cut rate to 6.25% in October last year, the lowest since 2014. So why did the MPC hold back this time? As a result of demonetisation. "Thanks to the flood of deposits that had come into the banking system, banks had already dropped their lending rates on loans and mortgages. Hence, regardless of what the central bank did, financial conditions had eased already. So, a rate cut by the MPC would have been a mere formality. Why waste a bullet when the shot has already been fired by the commercial banks?" wrote Nageswaran. Inflation expectations have also fallen in India. A RBI survey showed that people put the rate of retail inflation at 6.5%, double the actual rate, and the expected annual rate at 8.3%. Just a year earlier people put inflation rate at 16%. The Goods and Services Tax will be implemented from July this year. That will add to prices of goods produced by the informal sector, leading to the shutdown of many units, with a jump in unemployment. Economic reforms instituted in 1991 were supposed to boost manufacturing but the share of the sector in our GDP fell from 16.41% in 1989-90 to 16.2% in 2015-16. Demand for electricity fell in the last financial year and demand for fuel oil has fallen to lowest level in 13 years. If output has fallen prices could rise later. That is why the RBI decided to wait. It does not know.