One bold move deserves another.

The government is apparently furious with the Reserve Bank, write Mehta and Rangan. What is the Bank's crime? It did not reduce policy rate at the meeting of the Monetary Policy Committee last week. The MPC was set up by this government last year after its disagreements with the previous Governor, Raghuram Rajan who ridiculed those who wanted to "have it both ways, want lower inflation as well as lower policy rates". "By focusing on low inflation, we are abandoning old ways that benefited the few at the expense of majority poor," said Rajan. In a churlish gesture Rajan's contract was not renewed and the MPC was formed to transfer powers of the governor to 6 members, 3 of whom will be appointed by the government, so hopefully obey orders from the finance ministry. The ministry asked the MPC members to a meeting before setting rates but all the members refused, infuriating politicians, who are used to bulldozing over citizens. Why is there a perennial disagreement between the government, which wants lower policy rates, and the RBI, which wants to keep inflation under control? To add to the fire, retail inflation fell to a record 2.18% in May because of low food prices. The government set a target of retail inflation at 4%, +/- 2, which means a range of 2 to 6%. The RBI predicts inflation at 2-3.5% in the first half of the year and 3.5-4.5% in the second half, exactly in the middle of the range set by the government. So what is the problem? Apparently, inflation can only be lowered by sacrificing growth, called 'sacrifice ratio'. Aparna Iyer calculated the sacrifice ratio at 3.4%, which means that for every 1% fall in the rate of inflation growth will fall by 3.4%. If that is true why not let retail inflation climb to 100% which will stimulate growth to 340% and India's $2 trillion economy will race to $8 trillion next year and $18 trillion the year after? Ask Zimbabwe, whose central bank printed 100 trillion dollar notes, which would not buy a bus fare. There is fierce debate among economists on whether a reduction in policy rate is necessary or not. VA Nageswaran, who was scathing about the perpetual whining about low rates last year was recommending a hefty 50 basis points cut in interest rate this time round. This bickering between the government and the RBI is hurting Indian companies, wrote Andy Mukherjee. On the other hand, Rajeev Malik argued that retail inflation maybe low now but the RBI wants to be sure that it will remain within rage in the longer term. The RBI has to watch out for the US Federal Reserve, which meets this week, wrote M Bhusnurmath. If the Fed starts to tighten monetary policy in the US there could be an outflow of dollars, which would weaken the rupee and raise prices. Central banks in the west target an inflation level of 2%, which makes it almost certain that the Fed will raise Federal Funds rate by 25 basis points. If demonetization was a bold move by Modi, resulting in a catastrophic drop in food prices which is severely hurting farmers, then surely this is a bold move by the RBI? MPC rather than Modi.