It costs Rs 2.25 more to borrow Rs 100 in India than it did 15 months ago. And the Reserve Bank of India (RBI) isn’t done yet. The central bank finds banks have raised their lending rates by two and a quarter percentage points since March 2010 when it embarked on a series of 11 hikes in the rate at which it lends them overnight money. This makes life tough for anybody who borrows to manufacture anything in the country. But it’s tougher for producers that require consumers to borrow as well to buy their wares, like car makers and house builders. This pain is needed, the RBI feels, and it must spread to other parts of the economy. India is still growing too fast and unless significantly more animal spirits are deflated, the central bank sees no reason to change its hawkishness on interest rates. The squeeze doesn’t end here.
Strong words accompany the RBI’s latest, and some would say unduly stern, hike in interest rates. Inflation could yet get out of hand, governor Duvvuri Subbarao reckons, if global commodity prices, particularly oil, do not soften fast enough; if debt crises in Europe and America squeeze the dollar flow that finances our imports; if food prices spurt on a weak monsoon or higher price supports for cereals or inadequate supply of proteins; and most damningly, if the fiscal deficit balloons. With this list of caveats, the central bank has raised its projection of inflation by March 2012 to 7% from the 6% it had estimated less than three months ago. It, however, does not see the latest half a percentage point hike in interest rates denting economic output overmuch: the projection for GDP growth in 2011-12 stands at its May figure of 8%.
Fight prices the RBI will, even if it has to do it alone. It wants to “reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required”. Tuesday’s review of credit conditions is peppered with exhortations to the government to assist it in anchoring inflation expectations. Decisions on raising administered prices from food to fuel will shape the price line. Fiscal rectitude can help shift demand from a bloated administration to more productive investments by companies and households. Fixing supply bottlenecks in agriculture and infrastructure are vital to ensuring India’s growth dividends are not frittered away over higher prices.
The RBI is telling the government— in as much plainspeak as Mint Road can muster — to get its act together.