Stimulate what?

"A top Indian government adviser's suggestion that policymakers cut out volatile food prices while targeting inflation met with skepticism from many economists, who say it's inappropriate to ignore the costs of everyday items that consumers can't do without. The prescription for inflation-minus-food found mention in the government's pre-budget Economic Survey published last week." ET. This view was echoed by two members of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in its June meeting. They also argued for a change in the policy stance from accommodation to neutral. BS. In the end, the MPC kept its policy rate unchanged at 6.5%. Mint. Just as well, because the consumer price index (CPI) inflation rate for June jumped to 5.08% from 4.80% in May. pib.gov.in. Food price inflation was 9.36%. In the June meeting the RBI increased its growth forecast for FY25 to 7.2% from 7% but kept its inflation forecast at 4.5%. ET. If the economy is to grow at 7.2%, the fastest in the world, and if the RBI is projecting inflation at more than its mandate of 4% (ET), why do members of the MPC want to reduce the policy rate? Because, lower borrowing costs will help businesses to invest in new projects, thus creating more jobs, which will increase demand and further stimulate growth. Since food prices are dependent on supplies they can be safely ignored. But food is transported by trucks and trucks run on diesel. "Petrol tax in India consists of 55% of petrol's retailing price and diesel tax is 50% of the fuel's retail value." cleartax.in. In addition taxes on retail fuel, two years back, the central government increased the special additional excise duty, also known as the Windfall Profit Tax (WPT) on crude oil imports. That is because over 40% of our crude oil is now cheaper import from Russia. In 2022-23, the government raked in Rs 1.47 trillion and is expected to gain Rs 1.52 trillion this fiscal, wrote Venkatesh Nayak. Estimates of the neutral rate of interest have climbed after the pandemic, wrote Herendra Kumar Behera. Neutral rate is the 'real interest rate' after accounting for inflation and has gone up to 1.4-1.9%. ET. With the policy rate at 6.5% and the CPI inflation rate at 5.08%, the real interest rate works out to 1.42% which is at the lower end of the neutral rate range. The Economic Survey warned that retail investors are investing in the stock market rather than in fixed deposits in banks because, even though returns on fixed deposits in banks have increased by 2.44% from May 2022 to May 2024, it is not enough for investors. ET. This is resulting in valuations of shares rising to unsustainable levels while banks are having to borrow. "Banks borrowed a record Rs 1.19 trillion from the market to fund demand for loans" while they could mobilise only Rs 1.02 trillion from deposits in early July. ET. If the market tanks retail investors may be forced into distress sales, making huge losses and may not be able to repay their loans. Reducing borrowing costs may further inflate markets. And this inflation could burst suddenly. Perhaps, the MPC should look at human behavior. Not just to the GDP.