Avail 20% discount on updated CA lectures for Dec 21 .Use Code RESULT20 !! Call : 088803-20003

ICICI

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More


RBI’s Middle Path --Ashok Handoo

By avoiding an aggressive hike in policy rates and at the same time going in for a modest hike, the Reserve Bank of India has given a clear signal that it is focused on taming inflation, without affecting economic growth. What has been worrying the authorities is a steep hike in inflation in recent months which is nearing the double- digit figure, highest in 17 months, with food inflation as high as about 17.8 percent.

India has thus become the second economy of the Group of 20 after Australia to increase policy rates.

The problem has been all the more worrisome since food inflation is seeping into other sectors like manufacturing and the services sector. Inflation in non food manufactured products increased from –o.4 % in November last to 4.7 percent in March this year.

That the key interest rates have been increased modestly by only a quarter of a percentage point indicates that the RBI is as much interested in taming the high inflation as it is in ensuring that the growth moment generated through fiscal and monetary measures in the face of global meltdown, is not affected. As the Finance Minister Mr. Pranab Mukherjee said “It reflects a matured and balanced view of the needs of our economy”. It will have a “gentle impact” on the money supply in the economy.

At the same time, there is a clear message that the honeymoon period of soft rates is over and we have to get ready for a market driven economy.

The new rates set by the RBI, the second hike in a month, have pushed the Repo rate- the rate at which the central Bank lends money to commercial banks- to 5.25 percent. The reverse Repo rate- the rate it pays to banks for deposits- too has been set at 3.75 %. The Cash reserve ratio- the percentage of Bank deposits they must keep in cash - has been raised to 6%. All this is bound to reduce money supply in the system and thus exert pressure on high inflation rates.

The fresh measures are expected to suck away Rs.12,500 crore from the system. This fortunately is not going to increase the lending rates for the time being, as there is enough liquidity to absorb this hike. Credit, for now, is thus not going to be expensive which could have impacted growth.

The RBI is confident that inflation in the current fiscal will be reduced to 5.5 percent though Mr. Pranab Mukherjee believes it to be on the higher side. He estimates it 2 to be only 4 percent by the end of the fiscal year. The current year’s growth is estimated at 8.5 percent to be followed by a 9 % in the next fiscal.

There are, however, some risk factors too. The first one is the behaviour of the monsoon this year. If it rains well there should be no problem. The other is the way international crude oil prices move as these affect almost all sectors of the economy. The speed at which the world economy grows will also, in turn, impact our growth. The strong rupee appreciation has already started worrying the export sector, which has just begun to come out of the red.

There is no doubt that recovery is now firmly in place. Asia’s third largest economy is set to grow at a faster pace, with only China growing faster among major economies. As the Reserve Bank Governor, Dr. D Subbarao says, “we need to move in a calibrated manner in the direction of normalizing our policy instruments.” “More baby steps are better than high leaps” said Dr. D Subbarao.

There are indications that the key policy rates are going to be revised periodically to tame inflation, the single most worrisome factor for the Government. The first quarterly review of the monetary policy is due on July 27.

As the Finance Minister said “I am afraid we shall have to deal with it for sometime more but inflationary pressure on food items has started coming down”.

But there are limits to what the monetary policy can do. The effort has to be combined with other fiscal measures. Beyond that it will be the supply side and better distribution that can take care of the economy.

The option therefore, is to take a middle course, a balanced approach. That precisely is what the RBI has chosen to do.

"Loved reading this piece by Guest?
Join CAclubindia's network for Daily Articles, News Updates, Forum Threads, Judgments, Courses for CA/CS/CMA, Professional Courses and MUCH MORE!"






Category Others, Other Articles by - Guest 



Comments


update