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The monetary measures of the RBI persistently indicate, more than anything else, the fact that the economy is alive and kicking despite what the central bank terms, in its review of the first quarter of 2008-09, some “moderation”. Since June 2006, the apex bank has consistently relied on the short-term repo rate and, since December 2006, on the Cash Reserve Ratio to curb demand and, therefore, inflation despite its recognition that the price rise of primary art icles, and then fuel, was stoking it. Flog the economy as much as the RBI did with the dear money whip, it refused to stay down, a feature the finance minister was justifiably proud of. You can’t put a good man down; but then neither has the central bank succeeded in rounding up the villain. It has tried again with CRR and repo rate weapons. With the 50-basis-point and 25-basis-point increases in repo rate and CRR, both stand at 9 per cent from around 6-7 per cent last April.

The RBI’s encounters with inflation repeatedly remind us that the antidote lies in fiscal and economic policies to ensure higher supplies. A solution also lies in the hope that global fuel and commodity prices will ease. Since inflation is supply-constrained to start with, hardening interest rates will not help; input prices remain high and, as the RBI admits, higher interest payments contribute to higher costs that are passed on, as has been the case with steel and cement or falling sales and profit margins. The RBI expects eight per cent GDP for 2008-09; but do not bet on it. At some point, the economy will yield to its blows. Those interest payments — and where else can they go but up — will affect interest-sensitive sectors such as infrastructure as much as real estate and automobiles, with far more damaging consequences to the real economy. As for excess liquidity (an unacceptable money supply level), blame it on high interest rates persuading domestic companies to borrow cheaper abroad and bring in the dollars—over $22 billion in 2007-08--that release domestic rupees and swell liquidity.

Yet the RBI figures it can rein in inflation to 7 per cent by March. Does it also want the economy to maintain an 8 per cent growth rate given the rising input costs and interest payments? If yes, then it has to reverse course. Softening interest rates would not only dampen secondary inflation by cutting off the sources of excess liquidity, they would also encourage growth, investment and employment, and create fresh purchasing power where it does not exist. That is the need of the hour.

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