RBI is pushing the economy ahead with reforms
The Reserve Bank of India (RBI) governor, Raghuram Rajan, on Tuesday, sprang a surprise by raising key lending rates — the third such hike in four months — making it clear on which side of the line the central bank stands in the growth-versus-inflation tug-of-war.comment Updated: Jan 28, 2014 20:58 IST
The Reserve Bank of India (RBI) governor, Raghuram Rajan, on Tuesday, sprang a surprise by raising key lending rates — the third such hike in four months — making it clear on which side of the line the central bank stands in the growth-versus-inflation tug-of-war. In September, Mr Rajan had raised rates at a time when hopes were for the contrary. Price control remains the central bank’s top-most commitment, even if it comes at a cost of slower growth. That said, the third hike in the repo rate — the rate at which the RBI lends to banks — in four months comes with the attendant risk that it would climb up to the end borrower hurting consumer spending and corporate investment. The quarter percentage point hike in the repo rate to 8% means that it has crept back to the levels of what it was a year ago, implying that the previous year’s rate cuts have been fully wound down.
There is, however, a bigger message in the credit policy and the accompanying macroeconomic review: there is enough proof that all’s still not well with the Indian economy. Retail inflation measured by the consumer price inflation is expected to moderate from current levels, driven down by further seasonal softening in vegetable and fruit prices in the next couple of months. However, non-food, non-fuel inflation is expected to remain high, which means prices of many industrial goods could remain costly in the months ahead.
There are a few silver linings though. Various surveys indicate that business confidence has started to rebuild, even though growth in the current year is likely to be somewhat weaker than earlier projections of 5%. As the RBI points out, improved confidence and actions to support infrastructure projects could translate into a slow-paced recovery in 2014-15 provided these actions are sustained. The onus is squarely on the current and incoming government to hasten implementation of stalled projects, push ahead with reforms and aid a quick revival of the economy.