The Reserve Bank of India's new hikes of 25 basis points each in the repo and reverse repo rates have not come as a surprise to markets and analysts; indeed the central bank's actions almost seemed the right thing to do, so much has inflation control been identified with the RBI alone, despite the obvious failure of public policy to ensure timely supplies. Since price stability is the RBI's abiding credo, the repo rate hikes appear to be just the right medicine.
But they are not. Read the third quarter macro-economic review along with the second quarter review released last November, and the good doctor's diagnosis of inflation and prescriptive prognosis seem at odds with each other. In both the macro-economic surveys the central bank opens on a grand and optimistic note: GDP is inching towards 9 per cent on the back of “broad-based growth”.
Then both reports confess to cracks in the engine itself; there are “sectoral imbalances.” The latest report adds that agriculture has fared well with the kharif crops but the “supply response” of non-cereal food items to market signals — high prices, that is — are “weak”. In both reports, the six core-industry expansion is niggardly and, as the present review complains, “remains a constraint to growth.”
Both qualify their initial enthusiasm by pointing to Manufacturing's constricted growth: in November, the RBI noted that half of the 17 industries in the index with a combined weight of 26 per cent contributed 76 per cent of the output. So growth, where it counts most, is not all that it is cracked up to be. Now consider inflation, the prime reason for the RBI to lean on the rate button. In both the macro-economic reviews and the next day's credit policy statement justifying the current rate hikes, the RBI explains the origins of inflation in food and other structural factors.
As for the prices of non-food manufactured goods, crucial to general inflation, the latest review tells us that, at around 5 per cent, they are “stable”, having “flattened” over the months. In the credit policy review the next day it complains of such levels as “persistent” and “sticky.” Towards the end of both, it lamely warns us of the “risks” of demand pressures but the reasons for the RBI's intervention while growth is not yet “broad-based”, just as it wasn't in November, are unconvincing.
The rate hikes are marginal and have been “factored in” but the real import of the review lies in the minutiae of detail and its diagnostic skills; both show us that the prescriptions have to come from New Delhi, not Mint Road.