Symbolic action

In hiking the ‘repo' and ‘reverse repo' rates by 25 basis points from their current levels of 6.5 and 5.5 per cent respectively, the RBI has responded to market expectations. But alignment with the expectations of industry and trade need not mean that it constitutes the right linkage between monetary policy and emerging trends in the real sector.

The RBI is right in its assessment that growth impulses in the emerging market economies are robust and that the economic recovery in the US and the Euro area — a key driver of growth in the rest of the world — is gaining momentum. But the central bank has also referred to its concerns over the hardening trend in food and oil prices. Taken together, if anything, they only make a case for the monetary authority staying its hand rather than initiating a dearer money policy. It is on an even stickier wicket when it seeks to make out a case, albeit somewhat obliquely, that inflation — hitherto confined largely to primary articles and fuel — has begun to impact non-food based manufactured products. But the arguments only make out a case for removing market distortions through fiscal or regulatory measures targeted at those sectors rather than a monetary measure which must necessarily have wider ramifications. In any case, the prices of manufactured products, as a whole, have remained an island of tranquility, relatively speaking, amidst the sea of turbulence witnessed on the food and energy fronts. At an index level of 131.6 in February 2011 from 125.4 the same time last year the rise in prices works out to less than five per cent — the Lakshman Rekha of inflation in the economy that the RBI has often said it can live with.

Inflation in the domestic economy at the consumer level is primarily a problem of high intermediation cost between producers and consumers in the agricultural sector, compounded by administrative failures in shoring up factor productivity at the wholesale level. The RBI is, doubtless, aware of it but, as a concession to political correctness, has restricted itself to making laudatory references to the initiatives announced in the latest Budget. The hikes in policy rates would make little difference to the overall environment for interest rates in the economy. It is even less likely to make any difference to the cost of funds for the banking industry. Indeed, at the margin, it may cause even less of an impact on banks as they have been drawing down on RBI facilities in recent months. The central bank has merely gone through the motions of doing something to combat inflation. With a Government bereft of ideas and lacking in political courage and administrative purpose, the burden has fallen on the RBI to be seen as doing something lest the public, reeling under the impact of high prices, loses all hope of the state coming to its rescue.

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