The second quarter review of monetary policy announced by the RBI has surprised many stakeholders as they had expected a cut in policy rates.
In April there was one tantalisingly ‘calibrated easing’ as admitted by the RBI, against its hard-money stance from January 2010 till October 2011.
Unorthodox monetary policies currently in vogue in major economies such as the US and the UK to trigger a rebound in demand and rev up economic activity cannot be replicated in emerging economies such as India where inflation remains stubbornly high. Asked why the expectations of the real sectors of the economy have been dashed, the former RBI Governor and Chairman of the Prime Minister’s Economic Advisory Council C. Rangarajan told
“Under these circumstances, the RBI did not want to send a strong signal by reducing the policy rates. However, they have lowered cash reserve ratio (CRR) of scheduled banks by 25 basis points from 4.5 to 4.25 per cent. This will inject more liquidity into the system and will also improve the profitability of banks”.
Inflation, a challenge
It is small wonder that the RBI Governor D. Subbarao said in a statement that the persistence of inflationary pressures even as growth has moderated remains ‘a key challenge’.
Concerned over the ‘stickiness of core inflation, mainly on account of supply constraints and the cost-push of rupee depreciation’, the RBI stuck to its dharma and duty of ‘managing inflation and inflation expectations’ that continues to be “the primary focus of monetary policy’.
In a country where millions of people have their meagre means seldom indexed to inflation, the RBI has succinctly but forcibly put it that ‘a central premise of monetary policy is that low and stable inflation and well-anchored inflation expectations contribute to a conducive investment climate and consumer confidence, which is key to sustained growth on a higher trajectory in the medium-term’.
So, all the whining by the mandarins of the Finance Ministry that the Government has done its bit on the fiscal front by unveiling a five-year medium-term fiscal policy consolidation and it is for others to take a cue and act upon seems unconvincing.
Presumably, the central bank has its focus firmly fixed on taming inflation and inflation expectations and not get carried away by policy announcements that will take time for implementation.
No easy road ahead
The apex bank hardly minced words when it bluntly and pointedly noted that “recent policy announcements by the Government, which have positively impacted sentiment, need to be translated into effective action to convert sentiment into concrete investment decisions.”
The road ahead is not easy. Tackling the twin deficits, fiscal and current account, will be a Herculean task. As the central bank put in, while a persistently large fiscal deficit reduces the space for revival in private spending, particularly investment spending without swiftly stoking inflationary pressures, a large current account deficit poses challenges for financing it in the current global economic milieu.
More than the twin deficit, policy wonks wonder how the Government is going to get over the governance deficit which threatens the body polity and the economy over the long haul.