The Hindu Business Line : Inflation gets priority

As expected, the RBI’s focus has been to control inflation and bring price stability. The central bank has used CRR as a monetary tool to control inflation and kept other policy rates unchanged. Being a pre-election year, the priority of the government seemed more to combat inflationary pressures rather than giving priority to growth.

Inflation touched a three-year peak at 7.41 per cent for the week ending March 29 and is still above 7 per cent. This is significantly higher than the RBI’s comfort zone of 5 per cent and is expected to remain at elevated level in the near future due to higher energy, rising food and metal prices.

The Government has adopted several fiscal measures to rein in rising domestic prices. In the short run, the central bank may allow the rupee to appreciate for tightening the monetary policy and make imports cheaper, which will eventually help curb inflation to an extent.

Effect of CRR hike

Further increase in CRR by 25 basis points will lead to an increase in the lending rate, interest costs and rupee appreciation, which will further reduce the industrial growth that is already at a four-and-a-half year low.

All these factors clubbed with low export income and slow down in the demand may result in the lower net profits of the companies. Also ‘high cost’ is expected to force companies postpone capital expenditure that may lead to a vicious cycle on both demand and supply.

Industry will have to proactively work towards mitigating the adverse effect of this economic crisis through reduction of operating expenses, effectively utilising of funds and continuing to pursue key projects. Indian industry knows the art of surviving with an appreciating rupee and I believe that they will use their experience to resolve these issues.

On the Government’s part, it should speed up the regulatory process and approvals to support the industry in these challenging times. It’ll help to ensure that the projects of strategic importance remain on track and economy does not get into a trap of vicious negative growth cycle.

One of the major causes of inflation in our country is the high consumption of oil. Oil prices create cascading affects on the commodity prices, therefore accentuating inflationary impact. In an energy-starved nation such as ours any rise in oil prices have a more than proportionate impact on prices. Further, our propensity to increase the aggregate consumption of fuel is very high considering that a large number of our citizens are benefiting out of the increase in income.

In this situation, the crying need of the nation is to support, encourage, facilitate and expedite investment in oil and gas exploration and development to open up the hydrocarbon reserves. I am confident that this will have a more than proportionate impact on inflation, at the same time reducing the import dependency of our economy with respect to liquid fuel.

(The author is Managing Director and CEO, Cairn India.)

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