If the RBI thought the last fiscal was a trying one with its set of intertwining parameters such as growth that is not fast enough, soaring inflation and exuberant policy makers, it has yet to reckon with the current year's dilemmas. These dilemmas emerge from growth that is slowing down on account of falling industrial output, especially in the capital goods sector, persistently high inflation, and policymakers who would like the RBI to reverse its tight money policy.
It is against this backdrop of cross-eyed reality that the central bank will be delivering its mid-quarter review of the monetary policy today. Most bankers expect the Reserve Bank of India to raise its key rates by at least 25 basis points; others think that after nine spikes, it should loosen interest rates a bit. The third view is that markets have factored in the tight monetary policy — a euphemistic way, perhaps, of saying that the RBI measures matter little — and would, therefore, want the central bank to stay the course. There is merit in all of these views. After 15 months, interest rates have climbed considerably and the common view among corporates is that it is beginning to weigh heavily on investment plans and their order books. The RBI itself had noted in April, in its monetary policy for the current fiscal, that investment was dipping and that the business sentiment was not as roseate as it used to be. It is on account of these reasons that it had moderated its growth forecast. In retrospect, its tight money policies had worked in reducing prices, but only of those in the manufacturing sector, not those of food. In fact, all through the 15 months of consistent increases in its key rates, food or primary inflation stayed stubbornly high. All that one can say at this juncture about the RBI's tight money policies is that they have moderated manufacturing growth and, perhaps, that is why officials in the North Block would like it to reverse course.
It is possible that the RBI will continue to abide by its faith in its capacity to bring about price stability and so raise key rates by 25 basis points; or perhaps, it may not. But in either case, not only will markets remain unconcerned, but so will food inflation. Yet, the RBI must be seen to be acting on the inflation front. Unfortunately, as experience has shown, its initiatives will be as futile in their objectives as New Delhi's inaction has been. Clearly, the initiative for price stability and growth has to move to New Delhi.