Rate hikes sans comfort

As another monetary policy intervention by the Reserve Bank of India looms, there is growing evidence that the central bank's tightening of screws has begun to have its effect, although not quite in the way one would have liked it. The question to ask, however, is: What exactly have the central bank's persistent increases in its key rates influenced? Certainly not food inflation, that though has abated somewhat, still reigns at disconcertingly high levels despite the drop in global commodity prices. It is the stubbornness of food prices which feeds the growing impression that the central bank will, in its September policy, continue with its hawkish stance on monetary policy.

Where the RBI has succeeded for now, is in reducing the pace of over all demand. In its last monetary policy review, the RBI had singled out overheating as the prime reason for raising repo rates. As a result, interest costs are rising and will soon hit car sales, feel auto manufacturers. If that happens, one of the drivers of consumption expenditure will get affected, as will retail and personal loans over a wider spectrum of consumables. With the two biggest banks and largest lenders, SBI and ICICI Bank, announcing a 50-basis-point increase in their rates, borrowing costs are moving up to levels that were last seen nearly a decade and a half ago. Export growth is already feeling the pinch of high interest costs, as the Commerce Ministry Secretary recently confessed. When borrowers begin to shy away, waiting for another day for rates to become attractive once again, the banks, on their part, begin to get sticky fingers as a general mood of risk aversion sets in. That is what is happening right now, as banks flush with funds are finding few takers. Last year, they were crying for liquidity; in the first four months of the current fiscal, fresh flow of deposits into the banking system has shot up 50 per cent over the same period of the previous fiscal, while credit is slowing. The problem, as one bank official put it, will be felt in the second half, since fresh sanctions are decelerating. On the other side of the balance sheet, as it were, banks are likely to face mounting NPAs from SMEs and vulnerable sectors such as airlines and agriculture, setting in motion a fresh round of cautious behaviour on the part of banks.

In short, where the RBI is succeeding is in cutting demand and curbing growth in the hope that inflation in sectors that matters most to the common man too will, in the bargain, exhaust itself. But, so far, the relationship between the first two and the last is rather tenuous and all we are left with are definitive signs of growth slowing.

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