The Hindu Business Line : Not convincing enough

Given that the RBI is dealing with a problem of public perception, it was important that it spelt out in more detail the linkages that it expects to flow from its monetary policies.

The Reserve Bank of India has not made a convincing case that its latest monetary policy measures — hikes in the cash reserve ratio (CRR) and the repo rate — would anchor public expectations on inflation firmly at the 5-5.5 per cent mark that it had spelt out in the Annual Policy Statement released in April. The increase in the CRR of scheduled commercial banks (that portion of a bank’s deposit liabilities impounded by the RBI from being lent) in two tranches of a quarter percentage point each over the next four weeks, should theoretically translate into a proportionate reduction in the level of aggregate demand for goods and services in the economy and, consequently, a decline in the price levels. Eventually, there may be some reduction in the computed rate of inflation as any rise in prices of an order witnessed now would be on a higher base price. That still leaves a large gap between the current inflation rate (11 per cent) and RBI’s own target rate (5-5.5 per cent) to be bridged by making credit costlier for all players in the economy. The banking industry is still dominated by public sector banks operating under similar cost structure and possessing near-identical competitive impulse. So it is by no means certain that they would respond by hiking interest rates on deposits and loans for any economy-wide impact on prices. Given that the RBI is dealing with a problem of public perception, it was important that it spelt out in more detail the linkages that it expects to flow from its monetary policies. More so, as by its own admission, measures of the RBI impact the real economy only with a certain time lag.

The RBI has drawn some comfort from the fact that the Indian economy presents some positive features such as a financial market that is largely insulated from the turmoil affecting global institutions, adequate foreign exchange reserves, agricultural production that is poised to sustain the momentum achieved last year, and so on. Indeed, the only silver lining, if at all, in a scenario where the inflation rate has breached a 13-year record, is that the Indian economy presents a far more resilient look than it did in 1995 when inflation was of the same order. Equally, the economy is not without its share of disturbing features. The inflation is all-pervasive and not confined to petroleum products alone. It is hobbled by supply-side constraints in many key sectors that is aggravating the firm trend in prices caused by global factors. Above all, there is no evidence as yet that the administrative dynamism so essential to unshackling the economy is in place.

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