The Hindu Business Line : Stoking inflation

Addressing a symposium on global inflation in Paris last week, the RBI Governor, Dr Y.V. Reddy, reiterated the RBI’s focus on price and financial stability, especially for the poor, who are hit instantly by inflation. Back home, the Wholesale Price Index had already begun to breach the self-imposed 5 per cent tolerance level in the third week of February and continued its rise even as he spoke. As if on cue, almost every Wholesale Price Index climbed, with the food a nd primary articles WPI nudging the seven per cent mark. The Consumer Price Indices for agricultural labour and industrial, workers reflect the same uptrend after a period of relative stability. Though not at the January 2007 highs of 8-9 per cent, the trend has underscored Dr Reddy’s concern about unstable prices. Yet, recent practices of the central bank seem at odds with the Governor’s stated goals.

One of the principal ways that the RBI has combated inflation, especially those spikes on account of food and oil imports, was through restricted intervention in the currency markets that allowed the rupee to appreciate against the dollar. Over the past ten months, the rupee appreciated 12 per cent and had a salutary effect on the cost of essential imports such as food and oil. Since February, however, the RBI has been actively intervening in the dollar market, weakening the rupee by about 3 per cent. The timing could not have been more inappropriate since global food and oil prices have been hardening. Result: global inflation has been imported with an exaggerated effect. Admittedly, the central bank has to balance conflicting interests; a cheap rupee helps exporter margins but makes food imports dear, and vice-versa. If the key concern at present is a rising inflation rate then surely the RBI should allow the rupee to strengthen under the perfectly rational view that exporters can take a hit on margins more than the poor can at their bellies.

Timely monetary policies work well but not as well as policies that revive moribund sectors and make them productive. Despite huge investments till 2003-04 the irrigated net farm area has hardly grown, with parliamentary reports pointing to mismanagement. Other systemic problems that keep many States poor are almost commonplace. In a Planning Commission paper, Dr Arvind Virmani focuses on poor physical connectivity that hinders access to basic public goods. Inflation is now a global virus; the only way the economy can fight it is to strengthen its own capabilities and become more resilient.

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