RBI stands pat, but may soon have to sprint

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How do you balance growth and inflation?
How do you balance growth and inflation?

India Inc must be chafing. Like the proverbial priest refusing to implement what the God has sanctioned, the RBI has not relented to cut key rates. Emerging out of the slumber last week, the Government took some big decisions and this had, naturally, left India Inc thinking more good stuff was on the way, specifically the RBI cutting the key interest rates.

The central bank, however, is made of sterner stuff, and it showed little interest in cutting rates. But not to be seen as a party-pooper, it allowed banks to draw down on the money they keep with it for bad times, called Cash Reserve Ratio. Eaten up by worry over the rising prices, the latest numbers for August doing nothing to assuage the central bank, the RBI could not think of cutting interest rates.

Yet, India Inc need not turn to the wall and sob. At least, not yet. For, the RBI’s small move on Monday may just be the trailer with big action to come the next time round. Yes, the RBI may be blinded by its concern over inflation, but it cannot be deaf to the clanging alarm bells on low industrial output growth. This also means fewer people are wanting to buy goods. The central bank may have to make sure that there is not just enough doubloons floating around but that those wanting to can actually lay their hands on them without burning their fingers. So, the RBI may, after all, cut interest rates.

The danger light is also flashing on the pace at which the economy is growing. It clocked 5.5 per cent for the first quarter of 2012-13. Not up to scratch by RBI’s own hopes for 6.5 per cent for the year. It may lower interest rates to make credit cheaper, for people to buy and industry to invest.

But not so fast. Strain a bit, and you may hear the whine about the likelihood of prices going up because of the government raising diesel prices. Oops, can’t really please these people, can you? Just the other day, they were nodding their head when the Government took a ponderous step to prune the fuel subsidy bill!!

(This article was published on September 18, 2012)
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RBI could not withstand the pressure from India Inc. and reduced the CRR marginally,and
released Rs 17,000 crores into the economy,even though liquidity position is comfortable. This would definitely affect the inflation adversely to the detriment of the common man.

from:  Satyanarayana
Posted on: Sep 19, 2012 at 02:05 IST
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