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For a Mid-Term Review “set in the context of several complex and compelling policy challenges”, the Reserve Bank of India has no prescriptions to offer. It is true the central bank has been confronting the domestic liquidity challenge with frequent injections through CRR cuts, repo rate and SLR reductions and indirectly through interest rate hikes on NRI deposits and relaxations in ECB rules, all in the last two months. Yet on a day when the stage lights were f ocussed on it, and the markets all around were in panic, the central bank seemed to freeze. Bereft of further policy creativity, the central bank reverted to type, reasserting the need for financial stability. Its diagnosis of economic ills too does not cast much light on the complex problems an economy used to high growth, now faces.

Addressing the IMF early this month, the RBI Governor, Dr D. Subbarao, suggested the credit crisis would impact the emerging market economies including India severely. The mid-term review does not give that impression. There are no answers to the question everyone now seems to have: just how the global crisis will impact India directly through capital outflows and shortage of rupee funds, and indirectly through risk averse banks and a freefalling Sensex. Part of the problem is that the RBI is battling its old bete-noir, excess liquidity. The report tells us that non-food credit has increased by 29 per cent year-on-year as of October 2008 compared to 23 per cent last year; even discounting petroleum and fertiliser credit that jumped substantially this year, non-food credit still remains at 25 per cent. The report does not say why this higher credit growth has not translated into higher investments or sustained growth in GDP. Real Gross Fixed Capital Formation (GFCF) growth declined to 9 per cent this year from 13 per cent last fiscal; similarly, the first quarter saw 7.9 per cent GDP growth against 9.2 per cent the same quarter last fiscal; the RBI offers a cautious forecast of 7.5 to 8 per cent for the whole year. Does consumption account for higher credit? Not likely either, for the services sector output also fell and in any case, inflation, one of the best indicators of demand growth has been falling from its peak the last two months.

One clue lies in extra government borrowings and subsidies. The report mentions these as likely drivers of high demand pressures but does not factor in the changing scenarios that might just warrant some public policy stimulus to spur sluggish business confidence. Contrary to its own recent policy stances, the RBI offers no clues on how the Indian economy or monetary policy could deal with the “compelling challenges” confronting both.

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