Don’t blame RBI for government inaction
By
The New Indian Express
In line with its cautious but well-meaning and time-tested approach,
the Reserve Bank of India on Friday cut the key interest rate by a
marginal 0.25 per cent to 7.25 per cent — its lowest since May 2011 —
and kept the liquidity enhancing cash reserve requirement unchanged.
Though this came as a disappointment for industry and the stock markets
which had been hoping for a bigger cut due to easing of inflationary
pressures, the apex bank was quick to point out that the risk of
inflation persisted despite a recent sharp decline in wholesale price
index inflation and high current account deficit. This, RBI Governor D
Subbarao felt, posed the biggest challenge to the economy. India’s
central bank has continued to sound warnings about the Indian economy.
Its economic review released on Thursday had a distinctly hawkish tone.
The monetary policy statement released on Friday flashed the same signal
once again.
Monetary policy cannot afford to lower its guard against the possibility of resurgence of inflation pressures. It also has to remain alert to the risks on account of the current account deficit and its financing. This leaves little space for further monetary easing. The RBI has done well to reiterate the obvious risks that the Indian economy continues to face. By underlining the limited role of monetary growth, the RBI has sent a clear signal to the government. Finance minister P Chidambaram must deliver on the promises he made during his recent roadshow in America. Without initiating long-pending structural reforms the government cannot expect the RBI alone to ensure growth. That’s the message Subbarao has passed on.
Even though factors like lower commodity prices and narrowing fiscal deficit would help stem inflation, the upside risks to inflation are still significant in the short term in view of supply imbalances, correction in administrative prices of fuel and rising minimum support price for crops. The government will do well to take urgent measures to address the issues that are the real causes of economic slowdown. Blaming RBI alone will not do.
Monetary policy cannot afford to lower its guard against the possibility of resurgence of inflation pressures. It also has to remain alert to the risks on account of the current account deficit and its financing. This leaves little space for further monetary easing. The RBI has done well to reiterate the obvious risks that the Indian economy continues to face. By underlining the limited role of monetary growth, the RBI has sent a clear signal to the government. Finance minister P Chidambaram must deliver on the promises he made during his recent roadshow in America. Without initiating long-pending structural reforms the government cannot expect the RBI alone to ensure growth. That’s the message Subbarao has passed on.
Even though factors like lower commodity prices and narrowing fiscal deficit would help stem inflation, the upside risks to inflation are still significant in the short term in view of supply imbalances, correction in administrative prices of fuel and rising minimum support price for crops. The government will do well to take urgent measures to address the issues that are the real causes of economic slowdown. Blaming RBI alone will not do.
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