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Pulapre Balakrishnan's article, ‘Monetary policy not the answer to inflation' ( Business Line , October 3), is a breath of fresh air in an otherwise inane debate on whether the RBI should increase interest rates 25 bps or 50 bps (or stop altogether).
As is usual the world over, events overtake central banks. Before monetary policy wrings out inflation, the global financial crisis and economic slowdown will do it. Subdued ‘animal spirits' are more effective than interest rate medicine in checking ‘inflation expectations'.
No incentive to hoard
That supply shortfalls have driven food inflation is not true. There's no incentive to hoard or speculate, for who would want to when there are no shortages. India's warehouses are choc-a-bloc. The issue is how to store the bumper harvests this year. No one's complaining there's no supply. In fact, the Government is not averse to exporting and has taken some steps in that direction.
Rate hikes do not suo moto translate into tighter monetary policy, which is looser than generally thought. Money rates are in a narrow range in the repo-reverse repo corridor because the RBI is careful to maintain the latter's sanctity. The central bank is unhesitant in providing the necessary liquidity support to achieve that.
It's a truism that money causes inflation, but, in the circumstances, we have no better explanation. So, if inflation must really be brought down, there's no substitute for blunt instruments — pulling in liquidity or impounding incomes. (By extension, therefore, it's not just the RBI which is the point institution but Government too).
High costs
Obviously, both options have costs. And, let's face it, they are far too high.
Actually we need to look well beyond conventional reasons for the inflation problem. And the answer probably lies in asset prices.
India is in the midst of a stock market and property boom. (Recent falls mean nothing, considering the Sensex is still around 16,000 compared with 2,000 levels less than a decade ago. This applies to property prices as well).
What it means is that apart from rising incomes (well backed by productivity and exports in the private sector sufficient to carry the burden of largely ‘unproductive' Government), wealth gains, real or paper, significantly buoy the economy.
Asset booms are growth drivers. The surprise is that inflation is not higher and testifies to the robust supply response. ‘Wealth effects' are more important than reactive monetary policy.
Much of the headlines on the economic ‘slowdown' are completely overblown. The only noticeable impact is on capex and the causes may be an unwelcome market for IPOs and delays in Government clearances for infrastructure projects in the heightened anticorruption atmosphere.
Get real on inflation analysis. Pulapre Balakrishnan's is a good beginning.
(The author is Chennai-based financial consultant.)
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