With elections not so far away, there is going to be pressure on the Reserve Bank of India to relax monetary policy, according to Prof Jagdish Bhagwati.
Any government which is in power is going to attach a little more weight to growth, said the Professor of Economics, Law and International Affairs, Columbia University.
“I will expect that that pressure (to relax monetary policy) will continue,” he said at Exim Bank’s 30th commencement day annual lecture.
The professor felt that the inflation angle has been overplayed.
After cutting the repo rate (the interest rate at which banks borrow overnight funds from the RBI) by 50 basis points in April, the central bank has held this rate steady due to persistent inflationary pressures at around 8 per cent.
The industry and the Government want the RBI to usher in a soft interest rate regime to support growth.
Since the April annual policy, the central bank has brought down the cash reserve ratio (the slice of deposits banks have to park with RBI) by a total of 50 basis points to ease the liquidity pressure in the banking system.
Pointing out that the growth-inflation conundrum is perennial, Bhagwati said “In my opinion, you (the RBI) have to go back and forth because these are two different objectives (growth and inflation). You have got to be balancing them all the time.”
RBI autonomy
Bhagwati appreciated the fact that the RBI Governor has displayed an independent streak in monetary policy making.
“One good thing about Subbarao is that he has been showing independence. Lot of people say the central bank should be independent of the Finance Ministry. In that sense, the Governor has set a good standard,” he said.
Reforms
Right now the emphasis, because of the short-term decline in growth, revenues and so on, is going to be on the conventional kind of stage-one reforms. However, this doesn’t mean that the second stage reforms (health, education, etc) are forgotten.