RBI’S MONETARY POLICY = WHAT NEXT? = SUGGESTION = FUEL GROWTH BY CUTTING INTEREST RATES BY 2%

RBI’S MONETARY POLICY

WHAT NEXT?

SUGGESTION

FUEL GROWTH BY CUTTING

INTEREST RATES BY 2%

RBI’S monetary Policy exercises have always been very serious, enlightening and sincere exercises. But, in the last one year and more – its exercises have not yielded the desired results. In particular – RBI has been aiming to bring down inflation – but, inflation did not yield to RBI’s monetary Policy measures during this period of last one year and a half.

This has more to do with failure of some central and state Ministries to act tough against Inflation – rather than with the Policy prescriptions of the RBI.

If Inflation went up, it was not due to lack of RBI Action. RBI has given out the prescription – the one prescribed by the BOOK. But, it just did not work.

If Inflation fell some what, this too was not (and will not be) due to RBI Policy Actions. Here too, no fault lies on RBI. It prescribes the medicine – as prescribed by the Book.

But - Demand and supply management of Bank money alone cannot affect Inflation numbers one way or the other, in the Indian context. Much more is required. There is a much greater need for demand and supply management of Inflation-prone goods, products and services.

This has not been happening at the Central and states level – for some reason or other. On the other hand, many a time, when RBI announces Policies that are aimed at controlling Inflation, there is an almost simultaneous raising of prices of Oil, gas etc by the central Government, raising of expenditure by many Governments (central and state) and many other factors which are pro-inflationary.

One would expect that the central and state Ministries also make detailed study of factors causing inflation in specific sectors and enforce suitable measures to bring down inflation. Had this also been done, probably, the Inflation factor could have been better addressed.

In particular, there should have been quarterly meetings of central and state ministers, and secretaries – sector wise - to assess the causes of inflation and find out remedial measures. There were practically no significant, supply management measures attempted by any of the Governments.

Curbing demand in a country like India is a retrograde exercise.  Demand increase only can fuel Growth – as no measure of the Government can. Only supply management is needed to curb Inflation. This Blog has pointed out this in many earlier articles.

RBI’s monetary Policy measures may not have been effective in curbing Inflation. But, they were effective in curbing Growth. Growth in many crucial sectors has been showing distinct signs of deceleration. This needs to stop urgently.

RBI’s Policies can therefore help a lot in putting GROWTH BACK ON TRACK.

The repo rate has climbed to 8.5 percent in RBI’s Nov’2011 review whereas, it was 6.5 percent prior to its March,2011 review. This whole increase in repo (and similar reverse repo) rates has not been effective, and in retrospect, unnecessary, for controlling Inflation. It never controlled Inflation.

On the other hand, this 2 percent increase in Interest rates has seriously stifled growth during this same period.

This needs to be recognized.

Therefore, RBI can ROLL BACK  repo and reverse repo rates by  a clear 2 percent MINIMUM from current levels. This measure, it is sincerely suggested, will fuel growth, like no other immediate measure of Government can.

India is in bad need of Growth at this point of time. There is absolutely no need for European factors to stifle growth within India – except very marginally. India has tremendous demand potential for all Industrial and service products within India itself – and RBI must divert credit supply to fuel this demand, which will automatically bring forth the supply of products. Supply has been shrinking mainly because, demand has been shrinking.

Therefore, this time around, I do hope RBI will tackle growth needs more – by the above suggested action – and stop chasing Inflation numbers. This is better required to be done by the Governments at Centre and states by effective supply Management Measures.

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