Walking the tightrope | india | Hindustan Times
Today in New Delhi, India
Dec 11, 2016-Sunday
-°C
New Delhi
  • Humidity
    -
  • Wind
    -

Walking the tightrope

india Updated: Apr 25, 2007 23:39 IST

None
Highlight Story

Reserve Bank of India Governor Yaga Venugopal Reddy appears to have cracked the ‘good cop-bad cop’ routine. After a series of aggressive liquidity-tightening measures and interest rate hikes — the last interest rate increase was effected barely a month ago — the market was gearing up for more bad news. But by leaving all key interest rates, including the crucial Repo and reverse Repo rates (the rate at which the central bank ‘borrows’ or lends short-term funds to banks against government securities) unchanged, Dr Reddy has ensured that, for the moment at least, both banks and their customers can rest easier. Interest rates are unlikely to fall, but they are unlikely to rise sharply in the immediate term either. Earlier measures had in any case started to take effect, and the inflation target for the next fiscal has already been lowered. The markets and the corporate sector have reacted positively to the current direction of the RBI’s policy. However, by lowering the medium-term inflation target to 4-4.5 per cent, while lowering the forecast rate of growth in GDP to 8.5 per cent, Dr Reddy has clearly signalled that if forced to take a position on the inflation-versus-growth graph, he will opt for a stable or moderate rate of inflation, even if it means a slowdown in the growth rate. Corporate results tend to indicate that Indian corporates are not severely hit by moderate increases in the cost of credit.

The same is not true for individuals. One can understand the RBI’s concern over inflation. Sustained high inflation not only creates serious demand-supply imbalances, but also eats away some benefits of high growth. The finance ministry, on the other hand, needs to balance inflation control with the need to provide an environment that sustains a high rate of growth over a long period of time. Its stated policy of a ‘stable and moderate’ tax regime is predicated on the assumption that a rapidly growing economy will maintain revenues at a high level. Revenues which are needed for critical infrastructure investments, which in turn will help drive growth.

This is a tightrope which both the government and the central bank need to walk without falling off.