Impossible to get the monkeys of its back.

Everyone knows more than the Reserve Bank of India. As always, politicians and government officials have no doubts that policy rate must be lowered significantly. The Chief Economic Adviser, Arvind Subramanian wanted the rate to be reduced by at least 50 basis points. In June the Finance Ministry asked to meet all the members of the Monetary Policy Committee, to pressure them to reduce rates, but the MPC refused unanimously. "In recent times, seldom have economic conditions and the outlook warranted substantial monetary policy easing," said Subramanian in June this year, when the MPC kept the rate steady at 6.25%. In September 2015, Mr Subramanian was terrified of a looming deflation and even the eminent economist Arvind Panagariya was calling for a 50 basis point rate cut. To add to the fire, retail inflation fell to 1.54% in June. True, this is the first time in decades that prices are rising so slowly, but they are not falling, so there is no deflation. Giving in to the hysteria the MPC reduced policy rate by 25 basis points last week, but frustrated officials, who did not want to be identified, insisted that the RBI is 'behind the curve' and the rate should have been cut by 75 basis points. R Jagannathan thinks that "the RBI doesn't seem to know its backside from its elbow". He thinks that five of the economists on the MPC are idiots and only one, Prof RH Dholakia knows anything, because he recommended a 50 basis points cut. The RBI sets policy rate, not on the level of inflation at present, but on how prices will behave in the next 6 months to one year because policy rate takes a few months to have any effect. It has come under ferocious attack for its expectation of higher retail inflation when actually the rate has been falling. On the other hand, RK Pattnaik thinks that a rate cut was not warranted and the RBI acted just to get the monkey, or monkeys, off its back. Obviously, the RBI cannot blame the government directly, but Mihir Sharma points out that the RBI is quite clear that the fall in private investment is not due to interest rate, but due to the inability of banks to pass on the lower rates because of huge bad loans on their books and because implementation of infrastructure projects is too slow. Having advanced the Union Budget to January the government has already exhausted 80.8% of its predicted fiscal deficit in the first quarter itself. The farmer loan waiver is expected to cost Rs 3.1 trillion. Assam needs extra help because of floods. The Real Effective Exchange Rate, or REER, is 18% overvalued for the rupee, which makes imports, especially oil, cheaper. The US added 209,000 jobs last month and if this results in a rise in wages, interest rate in the US will rise, the dollar will get stronger and the rupee may fall. If that happens the monkeys will blame the RBI for rising inflation.