CEA: Time to change monetary stance

CEA: Time to change monetary stance

Context

Chief Economic Adviser Arvind Subramanian on Monday acknowledged that the country’s monetary authorities may have little choice now but to adopt a policy stance that lets them tamp down on re-emerging inflationary pressures

On whether RBI should change its stance as inflation is rising

Mr Subramanian said, “Now clearly the cycle has turned, inflationary pressures have re-emerged. So it is not just the fact inflation is picking up but also the fact if growth happens the output gap will also start narrowing. From both those perspective the stance of the monetary policy naturally has to change.”

Bond yields shot up

Bond yields shot up after the comments with the yield of new 10 year government bond ended the day at 7.44% as compared to its previous close of 7.31%.

Increase in Consumer price index based inflation – the central bank’s primary yardstick for monetary policy formulation – increased to a 17 month high in December following higher food prices. It was 5.21% in December just below the central bank’s tolerance limit of 6%.

MPC kept the rates unchanged

The monetary policy committee of RBI has kept the key policy rate or the repo rate unchanged in the last two meetings while keeping the neutral stance. The next review meeting is due next week.

Markets have misinterpreted the government’s additional borrowing

• He also said the markets have misinterpreted the government’s additional borrowing numbers as it does not reflect the underlying deficit.
• “Whatever the borrowing that’s been done by the centre and the especially the states, markets have misinterpreted that …it is not going to be financing new deficit but a change in financing away from the NSSF (National Small Savings Fund) towards market borrowing. And that is not a new deficit,” he added.