The Hindu Business Line : Inflation vaccine from Reddy's lab

THE Reserve Bank's policy mandate has always been a tightrope walk between multiple objectives. These are ensuring price stability, guaranteeing adequate credit for the economy and for the government's borrowing, and sustaining high growth.

On the one hand, the RBI must also regulate member banks and make sure that they remain reasonably healthy.

To add to this complicated mandate is the new responsibility of financial sector stability, and ensuring a smooth transition to Basle Two. And then there's also currency management!

In modern times, an additional quirk is that there is a continuous game of managing expectations of market players. If there's too much second-guessing, you might contribute to volatility. But if you merely meet expectations, some senior policy-makers are worrying that you may become a slave of market expectations!

Against this backdrop, the latest policy is as straightforward as can be. This plain speaking is indeed a hallmark of Dr Reddy's style.

The major concern flagged in the policy is that of price stability. Indeed the policy review mentions the word "inflation" 28 times. India's concern about inflation is mirrored all over the world.

For example, the headline inflation rate in the US is at a 15-year high, although the core inflation (stripping food and fuel prices) is benign.

Long-term inflationary expectations have also spiked as per the most recent consumer survey.

There has been a sustained rise in oil prices for more than four years. The average price of crude oil (in dollars) was 25, 29 and 38 in the past three calendar years, and is now running at $56.

In the last 24 months, global prices have gone up by 100 per cent, but in India they are up 56 per cent. This clearly implies an incomplete pass-through. Domestic WPI-based inflation is creeping up. In fact, though headline inflation is still below 5, the sequentially computed quarter-on-quarter inflation is close to 7 per cent and rising. So there is no room for complacency on inflation, and Governor Reddy's speech amply elaborated this point. The RBI's inflation target is still 5-5.5, but it says it will require extra help to keep prices from rising outside this band.

This means that it will need fiscal, currency and monetary tools to be able to tame the inflation monster. However, a 50-basis-point repo hike would have been too aggressive in this context, and might have dampened the growth momentum.

Credit growth is above 30 per cent for two consecutive years now.

That is quite unprecedented, and explains why the RBI has cautioned banks about being vigilant about credit quality, especially runaway credit for housing and stocks. But with three consecutive years of 7 plus per cent growth in GDP, this credit growth may not be all that inconceivable to sustain.

(The author is Chief Economist, Aditya Birla group.)

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