Monetary Policy

                                            The Freemen, 

Dear Brethren,

While performing its function, it’s the first duty of the executive to know whether they are possessed with sufficient information for a) performing the function, b) to measure the effect of such function. It is commonly perceived by those who are in know of the things that the executive lacks both the basic requirements as mentioned above. It was in this background that sometime back I wrote to reserve bank of India about certain inputs which are pari-material for lying the monetary policy. The details are as under;-

 

Sh C Krishnan, Executive Director, August 5, 2010                                                                                

Appellate Authority under RTI,

Reserve bank of India, Shahid Bhagat Singh Marg,

Fort, Mumbai – 400001.

Appeal under section 19 (1) of RTI.

Dear Sir,

Vide my letter Dt Nil I had asked following information under RTI;

Information sought;After RBI decides to increase rates;-

1)         How many company / business declare bankruptcies?

2)         How many accounts are declared NPAs

3)         How many people loose employment?

4)         How many mortgages are foreclosed?

Department of economic analysis must analyze the impact of increase of repo rates on employment/industrial production/ cost increase of supply and cost to economy. RBI must have the above information which is necessary to lay down policy?

Vide its letter Dt July 8 2010, the CPIO merely sent me copies of quarterly review monetary policy Dt 29.1.2010, 20.4.2010. Copy of his letter is enclosed.

The information sought for is not at all given which should form basis for monetary policy.

Hence this appeal. You are requested to supply the following information;

After RBI decides to increase rates;-

1)         How many company / business declare bankruptcies?

2)         How many accounts are declared NPAs

3)         How many people loose employment?

4)         How many mortgages are foreclosed?

Department of economic analysis must analyze the impact of increase of repo rates on employment/industrial production/ decrease in supply and cost to economy. RBI must have the above information which is necessary to lay down monetary policy?

           CA K D Aggarwal 
1.         The asker is 2^nd ranking economist on Yahoo India website; “in.answers.yahoo.com” category social sciences sub category economics. Byline ‘Kaps’ email id;  lovkap@yahoo.com.

2.         It is basic economic theory that prices(inflation) depends on demand and supply.

3.         It is a fact that higher interest rates leads to higher cost of production leading to business becoming unviable resulting in higher unemployment, closure of supply / factories and foreclosure of mortgages & higher impetus to exports by China.

4.         It is also a fact that money supply/liquidity is controlled by managing reserve ratio or by open market operations by RBI.

5.         While going through the quarterly review of monetary policy it was interesting to read Para 4 under domestic economy “One, India is facing rising inflationary pressure albeit largely due to supply side factors” (Emphasis supplied), How do you increase supply by increasing cost of funds ?

“Two …. Need to encourage domestic consumption and investment demand.

Three, since the Indian economy is supply-constrained, pick-up in demand could exacerbate inflationary pressures.”

Two and Three are contradictory leading to confusion as pickup in demand should have been offset by increase in supply side factors by reducing cost of funds further rather cost of funds was increased leading to hyper inflation in economy.

Lower interest rate regime (whose impacts will be seen over a period of 6 months to 1.5 years) led to improvement in industrial production as was noticed in para 8 of monetary Policy statement of 2010-2011.

To reduce inflation we need to increase supply. Supply side factors can be improved by reducing cost of funds to industry. Any increase in repo rates will exacerbate supply side factors.

                                                                    
         CA K D Aggarwal

Sh C Krishnan, Executive Director, Reserve bank of India vide his Order Dated 27.9.2010 dismissed the appeal saying that said information is not possessed by RBI  following is the relevant Para of the Order;-

“4.        I have gone through the papers and also considered the contentions of the appellant. While giving the original reply, the CPIO has given the relevant literature on monetary policy and provided the appellant with copy each of monetary policy statement 2010-11. Third quarter review of monetary policy 2009-10 and press releases dated March 19, 2010, and July 2, 2010. It’s needed to be mentioned here that the queries made by the appellant are not capable of eliciting any definite information from the Reserve bank or for that matter, any public authority. A query like the present couched in general terms and not confining to a particular year does not satisfy RTI Act requirements. I therefore find no scope for interference in the matter.”

Thereby admitting that the most relevant information which should form the basis of any monetary policy is not even possessed by the Reserve Bank what to say of it being considered.

CA Kapil Dev Aggarwal

Because our executive does not know the cause and effect of monetary policy So what we have is;  

see here for 2nd part of this series;
http://kapildevaggarwal.blogspot.com/2011/08/what-is-effect-of-increase-in-cost-push.html
CA Kapil Dev Aggarwal