The Reserve Bank of India (RBI) is taking a well-deserved break in its fight against inflation. Latest data, for November, show headline inflation slowed by a percentage point to 7.48% from a month ago. Food inflation, the bugbear for policymakers in the world’s second-fastest growing major economy, has been falling consistently from an average of 15.7% in the first quarter of 2010-11 to 12.3% in the next three months, to 10% in October and further to 6.1% in November. And although non-food manufacturing prices accelerated slightly to 5.4%, the trend in wholesale inflation is headed downhill. The central bank, which has indefatigably raised interest rates by 2 percentage points since March 2010, reckons inflation will settle at around 5.5% by March 2011.
If — and this is a big if — the dollars the US is printing in an attempt to climb out of recession do not force prices of commodities like oil and metals through the roof. Rising commodity prices will pinch an economy that grew 8.9% in the six months from April 2010. After dipping in August and September, factory output, critically dependent on international energy and mineral prices, grew by over 10% in October. Around a third of the inflation in October was imported, according to some analysts, since then crude oil prices alone have climbed around 9%. RBI governor Duvvuri Subbarao’s breather is likely to short-lived.
Mr Subbarao has used this hiatus to push more rupees into the banking system. The government is sitting on a mountain of cash — Rs 84,000 crore — after selling stakes in state-owned enterprises and auctioning airwaves for telephony. This cash is not flowing in the economy, as it should. Borrowers are queuing up at banks while depositors are wary of depositing their savings to see their value decline. The central bank has deliberately tightened liquidity over the past year so that banks are forced to pass on higher interest rates, but it did not foresee a profligate government squatting on cash. Banks are scrambling for money and overnight lending rates are going haywire. The lower reserve requirement and bond purchases should “inject liquidity on an enduring basis of the order of Rs 48,000 crore”, says the central bank. Mr Subbarao’s quantitative easing is in a completely different context from that of the US, it cannot be “construed as a change in the monetary policy stance since inflation continues to remain a major concern”.