In his maiden credit policy, Reserve Bank of India (RBI) Governor Raghuram Rajan has made his commitment to price control clear. The hike in the benchmark lending rate by the RBI comes bundled with alarm that this would eventually percolate down to the end borrower.
The RBI uses monetary tools to stymie demand and cool prices. It has kept interest rates high for most part of the last two years withstanding mounting pressure from business leaders and the government who have been arguing that high borrowing costs were hurting consumption demand and firms’ capacity expansion plans, both strong edifices of the India growth story.
Corporate investment activity was still too muted to suggest a definitive rebound in the economy, and a lot will depend on a rise in rural incomes driven by a normal monsoon. With the economy battling to claw out of a sharp slowdown and the rupee not far away from historic lows, suggesting another round of inflation, the mood is just not right for an interest rate cut. Can monsoon rain turn the economy around? The RBI governor hopes it will. India’s agriculture output grew 2.7% during April to June this year, down from 2.9% last year. When rain-dependent farm output is robust, rural income and, therefore, spending on almost everything goes up. This creates demand for manufactured goods, which, in turn, helps the economy. A normal monsoon could, thus, well turn out to be the perfect antidote for an economy hit by a crippling industrial slowdown.
Inflation is high and household financial savings are lower than desirable and no central banker would ignore the danger signs that these data sets are sending out. Mr Rajan, like his predecessor D Subbarao, made it clear that the RBI is firmly on the side of cooling prices in the continued price-growth contest. The capricious equity and currency markets may think otherwise, but the RBI governor believes, perhaps rightly, that India should build rather than fritter away the advantage that the Fed offered this week when it delayed an impending end of its $85-billion a month stimulus.
Inflation is high and household financial savings are lower than desirable and no central banker would ignore the danger signs that these data sets are sending out. Mr Rajan, like his predecessor D Subbarao, made it clear that the RBI is firmly on the side of cooling prices in the continued price-growth contest. The capricious equity and currency markets may think otherwise, but the RBI governor believes, perhaps rightly, that India should build rather than fritter away the advantage that the Fed offered this week when it delayed an impending end of its $85-billion a month stimulus.