The Hindu Business Line : A ready sponge

The Reserve Bank of India’s mid-term review of the economy and monetary policy for the first half of 2007-08 reassures the nation that the economy is steaming ahead and that, barring a few glitches — such as rising domestic food prices, a hardening global commodity outlook, zooming oil prices and a surge in domestic money supply — the economy should meet its high growth target. The reader may be forgiven for assuming that target to be in the range of 9 pe r cent, given that the first quarter of 2007-08 registered a growth of 9.3 per cent. But the RBI pegs its forecast to a more modest 8.5 per cent. Then it reaches into its monetary armoury and hikes the Cash Reserve Ratio 50 basis points to 7.5 per cent to suck out some of the liquidity froth, but keeps repo rates unchanged and banks guessing as to the direction of interest rates.

On television, the RBI Governor, Dr Y.V. Reddy, was at pains to stress the necessity of such a hike in the face of mounting capital inflows and the related pressures on domestic money supply that follow its mop-up of the dollars. Domestic liquidity, measured by M{-3} or Broad Money, was growing at 21.8 per cent in mid-October 2007, compared to 18.9 per cent a year ago, way too high over the acceptable levels of 17 per cent growth. For the second time, the RBI has hiked the CRR on account of surging capital inflows. In its review it concedes that “moderating” such flows to align M{-3} around 17 per cent is one of its central tasks. This means that monetary policy will continue to exercise control over one of the most important indicators of a booming economy. This is a pity because, with a more strategically-oriented management policy framework, such as the one the Chinese government adopts, New Delhi could be taking the initiative to put those flows, other than “hot money”, to much better use than letting the RBI sequester it through CRR hikes. But New Delhi is witnessing a policy blackout and this is evident from its silence over the RBI’s other concern — inflation.

To tell the nation the economy is subject to global price shocks is stating the obvious; to state that headline inflation measured by the Wholesale Price Index is under control, at around 3 per cent, is to say nothing because, in the same breath, the central bank also admits that domestic food inflation is over 7 per cent. As it is, credit growth is declining and the fresh CRR hike will not encourage banks to reduce lending rates. The economy needs a fresh dose of initiative to tackle food inflation and revamp the regulatory framework, all the better to use capital inflows to enhance productivity for core sector growth. In short, New Delhi must take over from Mint Street.

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A ready sponge

Mid-term Review of Monetary Policy 2007-08: Exceptional response

The lull before the storm?

Preserving status quo

In the right direction

RBI’s worry on inflation continues

Stem the forex flows

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Inflation still the key concern

Maintaining stability

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The P-Notes issue