The Hindu Business Line : Tomato prices on the Mint Street

Chennai April 22 The most recent of Dr Y.V. Reddy's speeches, on www.rbi.org.in, is titled `Role of Monetary Policy in Attaining Growth with Stability: The Indian Experience,' delivered at the Bank of Greece, Athens, Greece on April 2.

The Guv's address, which was on `a theme traditionally close to the heart of any central banker but gaining increasing and broader relevance in the context of market integration and globalisation,' included a discussion of `reining in inflation and containment of inflation expectations.'

Of importance, because `inflation' refuses to disappear from the headlines. "Inflation now is more than half a point above the Reserve Bank's ceiling of 5.5 per cent," says www.turkishpress.com in a report dated April 22. "Food-price inflation has been climbing in India, China, Europe, and even smaller economies like Turkey, South Africa and Poland," notes www.chieftain.com, in a story filed `6 hours ago.'

Meanwhile, the Finance Minister has urged us all to swallow some "bitter medicine" for the sake of economic growth. It is unreasonable to expect the RBI to take knee-jerk measures to curtail inflation, the FM has reasoned. Because, "The RBI can't control the price of tomatoes."

Or, can it? To find an answer, you can try to decode Dr Reddy's words: "The volatility in the inflation rate, as measured by the coefficient of variation, which was fairly high in the 1950s at 4.4, moved in a narrow band of 0.4 - 1.0 in the subsequent decades, thus reducing the inflation-risk premium." Toughie, actually, for the majority.

There is a giveaway, however, in a section where the Guv's speech uncharacteristically indulges in some self-patting, by quoting from a recent book by Sadiq Ahmed of World Bank titled `India's Long Term Growth Experience,' thus: "On the whole, the ability to contain India's inflation rate at substantially below the world rate and the rate prevailing in non-oil-exporting developing countries during both phases is a testimony to the sound conduct of monetary policy." Put simply, there was perhaps the hand of the Mint Street behind the hike in subji prices!

To achieve `price stability' and maintain `appropriate liquidity is maintained in the system' the RBI uses multiple instruments `flexibly, as warranted by the situation,' such as the following that the Guv listed to his Athens audience: `open market operations (OMO) including Liquidity Adjustment Facility (LAF), Market Stabilisation Scheme (MSS) and cash reserve ratio (CRR)... '

Contrary, again, to what our FM said, central bankers are preoccupied with inflation, as you can find in the comments of Mr Jeffrey M. Lacker, President, Federal Reserve Bank of Richmond, on a report about `inflation dynamics' at the US Monetary Policy Forum 2007, in Washington, DC, on March 9. "The current value of money depends on value people expect it to have in the near future, and thus the current inflation rate depends critically on what people expect inflation to be in the near future," he said.

"Inflation expectations are an outcome of monetary policy, not an autonomous help or hindrance," stated Mr Lacker. "Central banks are as responsible for the behaviour of inflation expectations as they are for the behaviour of inflation."

Now, who will tell the FM?

More Stories on : Events | Economy | RBI & Other Central Banks

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
ICICI Sec sees repo rate hike

Public sector banks' home loan growth rate slowing down

Inflation fears dog market even as insurers return

Auto, consumer durables hit by interest rate hike: CII

SBI to raise up to Rs 10,000 cr

BoB takes new partners for Malaysian arm

Tomato prices on the Mint Street

South Canara co-op bank profit