Monetary Policy

A soft monetary policy
This refers to the Article on ' a soft Monetary Policy( Business Line dt 23/4/10).The monetary policy has rightly pleased the market banks and borrowers, but is not an answer to ever increasing inflation faced by common man. The food inflation has touched 17.65% and by any reckoning it can only increase in the coming months.The projection of whole sale Price index at 5.5 Percent by March 2011 has not been well justified or explained by RBI. The Government's expectation is still below 5.5% . As per the paper reports , there is a move to further increase the fuel prices when the damage done to inflation by an earlier increase through budget has not yet been removed by any administrative measures particularly by state governments.
The present inflation is both on account of supply constraints and demand driven.The measures by RBI are basically to contain inflation from demand side and from this angle the steps as rightly pointed out in the article do not measure upto expectations as CRR increase of 0.25 % is insignificant in view of high liquidity surplus and easy monetary conditions in the system. There are no other measures to compel the banks to make money dearer particularly for borrowers engaged in speculative activities . Repo and and reverse repo rates have their own limitations.It is high time the Reserve bank introduces some innovative measures or revive the Bank Rate suitably to influence credit flows particularly speculative credits affecting inflation.

Edited version appeared in Business Line Dt26/04/10

Dr. T.V Gopalakrishnan