Market participants will be waiting with bated breath, hoping that the Reserve Bank of India (RBI) will shower goodies for all. We can trust the RBI to set out a well-crafted Policy Statement today as part of its Mid-Quarter Monetary Policy Review.
The Indian economy continues to grow at a healthy rate of growth but there is gloom that we are no longer enjoying a 9 per cent real rate of growth.
In India, policymakers, opinion makers, India Inc. and the public at large refuse to accept that there are cycles in economic growth and that it is not possible for an economy to grow at higher and higher rates of growth.
Once an economy overheats, a slowdown is inevitable. The RBI and the government need to seek the advice of Gita Gopinath, the young Harvard Professor, who has specialised in economic cycles in the Emerging Market Economics (EMEs).
Growth and inflation
We need to recognise that the global economy faces a number of serious threats which could result in a hair-curling slowdown.
Given our proclivity for policies which serve narrow sectoral interests, we believe that the laws of economics do not apply to us in India, simply because we are different.
We debunk the relationship between over-heating and generalised inflation. Of course, we can always blame the slowdown to the global contagion.
The fact that inflation in India is well above that in major industrial countries is just not our fault! If the rupee is depreciating, it is all because of problems faced by the major currencies.
The RBI has a major task of reconciling policy contradictions. It is now generally accepted that the growth rate in 2011-12 would reflect a sharp slowdown.
While the official line still is that the growth rate will be 7.5 per cent in 2011-12, the top policy honcho, Dr Kaushik Basu, has conceded that the rate could be 7.25 per cent.
With the shocking industrial production numbers, there are many analysts who are already talking of an even lower growth of 6.5 per cent. What is not fully appreciated is that, even at a growth rate of 6.5 per cent, we would continue to be one of the fastest growing economies in the world.
The overall inflation rate continues to be in the 9 per cent plus range. It is unconscionable that the RBI is being blamed for the inflation just because it has been fighting it with a series of repo rate increases.
Some analysts would see a glimmer of hope in food inflation falling to 6.6 per cent and hope that the base effect would bring down the year-on-year overall inflation rate to 7 per cent by March 2012 so that we can claim victory over inflation. It hardly needs to be stressed that the battle against inflation is far from over.
RBI intervention
If, at all, monetary policy is to be blamed, it is because the RBI has not raised the repo rate more sharply, and also not raised the cash reserve ratio (CRR) to tighten liquidity. But, then, this is nobody's criticism of the RBI.
As stressed in these columns, the window of opportunity for monetary policy action is very narrow and it is now clear that the authorities have missed the opportunity to slay the inflation monster.
The fisc is hopelessly out of alignment with the objectives set out. The slowdown in the industrial sector is no surprise. The exchange rate is under pressure precisely because when the capital inflows were large, the rupee was allowed to appreciate as the RBI did not intervene.
Now that the rupee is under pressure, it is not prudent to intervene to slowdown the depreciation.
The balance of payments current account deficit (CAD) is reportedly over 3 per cent of GDP — the highest among the Asian EMEs. Taking all factors into account, it would be best that the RBI does not attempt either direct or indirect relaxation of monetary policy.
Standstill policy
Now, what is it that RBI should not do in its policy announcement today?
First, with inflation where it is, there should be no question of reducing the repo rate. Secondly, the RBI should not respond to the cries of the seductive sirens pleading for reduction of the CRR.
Thirdly, the RBI should not aid and abet the government's unreasonable demand that it should be able to borrow more at lower interest rates. More particularly, the RBI should not drive down yields on government paper by undertaking large open market operation purchase of securities.
The present monetary policy measures are far too mild and allow arbitrage opportunities to banks to borrow from the RBI and profitably on-lend these funds.
To sum up, the RBI would serve the larger interests of overall stability and growth by a standstill policy.
A monetary policy relaxation would earn encomiums for the RBI but would be detrimental to long-term growth with price stability.
(The author is an economist. >blfeedback@thehindu.co.in )