The Hindu Business Line : A fight against rising inflation

New Delhi, July 30 Predictably, the apex bank has lived up to its reputation of adhering to a strict monetary regimen when inflation and inflationary expectations have been rearing their dark heads, derailing the fruits of growth and hurting the aam admi harshly.

RBI’s dear money policy of hiking the repo rate by 50 basis points from 8.5 to 9 per cent immediately and raising cash reserve ratio by 25 points to 9 per cent prospectively from the fortnight beginning August 30, has brought instant resentment from the trade and industry and other productive segments of the economy.

Presumably, the vexation stems from the fact that credit might turn out to be a binding constraint when they have to wrestle with innumerable disabilities in operating in the country’s high-cost economy.

Industry concern

The ire of the industry is understandable because the increase in the CRR announced on June 24, in two stages of 25 basis points each effective from July 5 and July 19, sucked out a sum of nearly Rs 20,000 crore from the system as conceded by the central bank.

A further dose in a month’s time would further restrict the lendable funds from the system, exacerbating their woes.

Against ‘limited supply elasticities’ in the short-run and aggregate demand pressure with indications of “growing fiscal stress in the volume of off-budget borrowings by the Centre, impending expenditures on account of food, fertiliser and POL subsidies, the debt waiver scheme and the award of the Sixth Pay Commission with consequent pressure on aggregate demand”, the RBI has plumped for an adjustment of overall aggregate demand on an economy-wide basis.

The dear money policy is to ensure that the “generalised instability does not develop and erode the hard-earned gains in terms of both outcomes of and positive sentiments on India’s growth momentum”.

No wonder the bank proclaims the overall stance of monetary policy in 2008-09 would be “to ensure a monetary and interest rate environment that accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets, while being conducive to continuation of high growth momentum with due emphasis on credit quality and credit delivery”.

GDP projections

Conscious of its inflation-fighting monetary policy with liquidity management receiving priority in the hierarchy of policy objectives over the period ahead and its attendant impact on the high growth momentum, RBI has revised GDP projections from the April range of 8 - 8.5 per cent to 8 per cent now.

With its sobriety on the ground, the apex bank concedes, at this juncture, a realistic policy effort on its single-handed inflation fight would be to bring it down from the extant level of about 11-12 per cent to a level close to 7 per cent by March 31, 2009 and not the 5.5 per cent level for the current fiscal which it set store by till recently.

Genuinely gripped by the spectre of inflation and the need for due external sector management, RBI repeats its nostrum that “the evolving fiscal conditions in an atmosphere of persistent inflationary pressures pose severe challenges to monetary management, especially if supply inelasticities continue to prevail in the short-term”.

In its quest for quelling inflation, the monetary authority momentarily lost balance when it asks whether “it is worthwhile to explore the implication of this rapid build-up in buffer stocks, in particular, the possible unintended consequences of limiting market supplies at a time when demand-supply gaps are strained and reflected in elevated food prices”.

If the banking system down the line minimises lending operations for maintenance of buffer stocks of agricultural commodities and foodgrains and if there is any diminution in food credit on that score, the ammunition of food security would get axed, defeating the objective of stable price of essential commodities of common consumption for the masses.

Caution to banks

Stung by the fact that some banks have expanded credit rapidly in relation to the system level of growth with concomitant worsening of their credit-deposit ratios, it rightly cautions banks to focus on stricter credit appraisals on a sectoral basis, monitor loan to value ratios and generally ensure the health of credit portfolios on a durable basis. Its admonition that if need be RBI would consider undertaking supervisory review of those select banks which are over- extended in terms of their credit portfolios relative to their sources of funds is a timely signal to the errant elements in the system to price risk prudently.

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