When and where the roads of Govt and Reserve Bank will meet?

T.V. Gopalakrishnan

 

As the Government has decided to walk alone with its fiscal policy measures, the Reserve Bank also seems to have decided to walk alone for some more time with its monetary policy measures till it finds comfort level in the matter of inflation Control.

From the latest policy announcement it has been amply made clear that the RBI prefers to remain highly professional not yielding to market sentiments or the Government pressures either.

On the basis of the current macroeconomic assessment, which has not registered any perceptible change since the last review of the monetary policy, the Reserve Bank has decided to keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.25 per cent of their net demand and time liabilities; and keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent.

Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) and the bank rate at 9.0 per cent.

By keeping the status quo on its policy rates through its third quarter monetary policy review on Dec 18, the Reserve Bank has once again shown its professionalism and determination to fight against inflation even at the cost of growth.

It can be well inferred from its policy statements all these years that low inflation will certainly pave way for sustainable growth and people at large deserve to be protected from ever spiralling inflation.

There are clear indications that the RBI is not comfortable and convinced of the inflation trend seen in the economy. Though the Wholesale Price Index and the core inflation may have a declining tendency marginally, the underlying forces continue to be a threat for inflation to register a fall according to the RBI’s assessment.

The Consumer Price Index which affects the people at large more than 80 per cent of the population has been on the rise touching 9.9 per cent and the risks to contain this are far more than what is generally perceived. It all depends on so many ifs and buts which may not come true according to the past trend. The fact that the deposit growth has not been picking up has been reflective of the poor savings potential of the masses.

While the prices of fruits and vegetables have skyrocketed and become untouchable for majority of the masses, they are also not available in plenty due to low production and supply constraints. Banana, which was available at Rs 2-3 a few months back, is costing above Rs 5 a piece. Likewise, the green vegetable, a very common item consumed by masses, has suddenly become a very high luxury and unapproachable item.

The prices of vegetables and fruits are ranging between Rs 40 and Rs 300 in retail markets.

The RBI has admitted in its policy review that both the external and domestic environment have some positive developments but their continuity and stabilisation are not convincing for initiating any relaxations in the policy rates for the present. It cannot and perhaps it does not want to, change the track and relax the policy rates as the macro economic factors have not shown any appreciable or sustainable improvements.

The current account deficit which has been in the range of 4.2 per cent of the GDP has not been in the comfort zone and the imports continue to rule at high level although the value of oil has registered a decline and the benefit of which has been nullified by depreciation of the rupee. The fiscal deficit also remains unchanged at5.3 per cent and how far the positive moves of the Government would help to bring down the deficit at sustainable level cannot perhaps be factored into by the RBI.

These ratios can only aggravate in case the GDP falls further. The GDP is forecast to be below 6 per cent this fiscal and it may take some years to touch the 9 per cent level. In this background, the RBI cannot be but cautious in its measures as once they are relaxed, they cannot be rolled back instantly.

The Growth of GDP is not in the in the hands of the Reserve Bank alone. The maximum the RBI can do is to make funds available towards investment and credit and this has not been adversely affected although the money supply and the deposit growth have come down.

The RBI cannot initiate measures to attract investors by its policies. At best, it can only supplement the measures initiated by the Government in this regard. The interest rate though an important component in the factors of production cannot be said to be deterrent as the growth in industrial production has indicated in October.

The RBI is a better judge and professionally equipped to evaluate and decide the cost of money to attract investment and from this angle inflation which inhibits and brings down the real rate of interest for investors has to be necessarily under control on a long term basis.

Last three years’ efforts of the Reserve Bank have not yielded the desirable benefits in inflation front is a sad commentary as the fiscal and administrative measures were not in tune with the monetary policy measures. However, it is gratifying to note that a sort of assurance has been held out by the Reserve Bank by saying that softening of policy rates would be considered in the last quarter commencing from January if inflation index registers a fall and measures are in place to contain the staggering fiscal deficit.

The economy can perform well only if both the Government and the RBI are on the same road and they take joint efforts mutually respecting each other’s role. Hope the roads they are presently on are not parallel.

The policies they take should meet the aspirations of the majority of the people and their welfare. Inflation which is said to be the worst enemy of the masses needs to be drastically brought down and for that the cooperation of the Government, industrialists and the administrators is very much essential. Once inflation is under control, savings will pick up, liquidity in the economy will improve, interest rate will fall, confidence in the Government and the economy will revive and investment will increase and better GDP growth will be the end result. This is what perhaps the RBI is targeting.

(The author is a Consultant in Bangalore. The views expressed are personal)

(This article was published in the Business Line print edition dated January 14, 2013)