Inflation tremors, the key message

G. Srinivasan New Delhi | Updated on January 25, 2011

The ‘dominant concern' of the ‘intensification of inflationary pressures' in emerging economies in general, and in India in particular, due to sharp spurts in ‘food, energy and commodity prices' has played a key part in persisting with its tight money policy by the apex bank while reviewing its third quarter monetary policy, on Tuesday.

In keeping the bank rate at 6 per cent but re-jigging the repo rate under the Liquidity Adjustment Facility (the rate at which the apex bank lends money to other commercial banks) and the reverse repo rate under the LAF (the rate at which RBI borrows from other commercial banks in subscribing to Government securities) each by 25 basis points with immediate effect, the RBI loftily contends that these are meant to “manage liquidity to ensure that it remains broadly in balance, with neither a surplus diluting monetary transmissions nor a deficit choking off fund flows.”

But the apex industry organisation, the Confederation of Indian Industry, does not countenance this, cautioning the RBI that it is “setting the stage for a series of rate hikes that will have a negative impact on the investment momentum going forward.”

Working capital woes

Even as trade and industry was upset over the dear money policy in terms of working capital woes in an already high-cost economy, the apex bank argued that even in the face of tight policy staggered from October 2009, the total flow of financial resources from banks and non-banks to the commercial sector during the first three quarters of the current fiscal was Rs 9.01 lakh crore, up from Rs 6.36 lakh crore during the corresponding period of 2009!

It pertinently noted that credit expansion in the recent period has been rather sharp, far outpacing the expansion in deposits” and “rapid credit growth without a commensurate increase in deposits is not sustainable,” as it heightens the mismatch menace, imparting systemic instability to the banking industry.

As its principal dharma is to safeguard price stability as inflation is the cruellest form of taxation particularly for millions of people without indexed income, the RBI reminds industry and trade that besides imported oil (most of which, not only crude oil but also cooking oil), the prices of some primary non-food articles have risen sharply now.

“Since these are inputs into manufactured products, the risk to headline inflation is not only from the increase in non-food items but also because the increase in input costs will ultimately impact output prices,” sternly reminding the industry that high inflation would aggravate its cost disabilities.

Food price inflation

The updates on the World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR), two flagship analyses by the International Monetary Fund (IMF) released on Tuesday, categorically stated that “upward pressure on commodity prices is expected to persist this year, due to continued robust demand and a sluggish supply response to tightening market conditions.”

“Moody's Analytics” also, on Tuesday, said that because food accounts for a large proportion of the consumer price index (CPI) in emerging economies, structural food price inflation will quickly spill over into broader price pressures, “dislodging expectations, prompting increased wage demands and degenerating into a growth-sapping wage spiral.”


Published on January 25, 2011

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