RATE CUT… C R R
CUT… RATE CUT
WHAT WILL IT BE THIS TIME ?
RBI MONETARY POLICY
QUIZ
The Reserve Bank Of India is almost religious when it
comes to handling INFLATION. This is traditionally considered one of the
important functions of any Central Bank. The one weapon the Central Bank uses
for inflation control is REPO & REVERSE REPO RATE HIKE. With the help of these
rates, it seeks to monitor and adjust the liquidity in the Banking system,
thereby control the credit and money flow into the economy – which is expected
to impact on the Inflation by acting on the Demand side (Usually).
RBI has used it 13 times in very quick succession, when
Inflation was climbing up the ladder from 2010 onwards.
Even as these Rate Hikes were happening, Inflation was
galloping up faster; and did not seem to respond at all, to the Medicine that
RBI was administering.
In my view, and this view I have said a few times
earlier on this blog, INFLATION, especially the FOOD INFLATION part of
Inflation (in Indian conditions) does not respond to the RBI RATE HIKES. It
never did. If Inflation did ever come down it was due to SUPPLY SIDE easing and
not because of Rate Hikes.
Even Inflation in Non-Food Products also has not
responded to Rate Hikes.
So what did RATE HIKES actually do?
They hiked the Cost of capital for the entrepreneurs and
they also hiked the cost of buying for buyers of goods. Thus, on one side, IIP
was hurtling downwards and on the other side, many sectors were facing demand
reduction and consequent production cuts. But, did it reduce the prices of
those goods because of demand reduction? No way.
Given the spiraling raw
material costs – like minerals, oil, gas, coal, iron ore & other ores,
electricity tariffs and so on - there
was no way, the prices of any manufactured products could come down. Thus, whether it is
core inflation or headline inflation, whether it is of food and food products
or of non-food products – inflation was going up, despite Rate Hikes.
Even factoring in the lacunae which surface, time to
time, in the compilation of the Basic data like IIP, yet, INFLATION, in general
perception, was probably higher than what the INDEXES represented, not LOWER.
In the circumstances such as these, is it necessary to
keep the REPO & REVERSE REPO rates at the current High levels? If so, for
how long?
What if, Inflation climbs a few notches higher from
current levels? Will RBI hike RATES again – or, keep them at current, already
high levels?
It is beyond doubt now that GROWTH is adversely affected
– and at least one of the major factors at work is the HIGH RATE STRUCTURE of
the RBI.
From what Mr. stiglitz has said recently, and I totally
agree with him, GROWTH is much more
important to be managed compared to INFLATION.
Many Industry leaders are clearly batting for RATE CUT.
Even the Government has thrown enough
hints that it prefers a RATE CUT at this point of time. On its part, it has
complied with some of RBI’s suggestions like Oil and Gas price hike, FDI
approvals and so on. It is also working on Fiscal deficit. So, in the short
run, what could be expected from Government at policy level, has been done.
On
the Food Inflation front, the concerned Ministries can of course do much more.
It is meaningless for our Governments, both central and states, to be waiting
for a Wal-Mart to come and construct storage spaces, proper transportation
facilities and so on. Our Governments should be doing all this. Or, Governments
should be giving sufficient incentives to Indian entrepreneurs to do these in a
Big way.
This said, RBI’s stand on Food Inflation especially does
not seem to stand the test of logic. If Repo & Reverse Repo Rates do not
affect Food Inflation one way or the other – why keep the rates HIGH, because
of food Inflation?
In my view, INFLATION in India reflects a failure to act
– on the part of the Central and State Governments – not of RBI. They must act
– not necessarily the RBI. If they don’t, RBI’s RATE ACTION will be pretty much
useless. And, that is what is happening for last two years. But, no one can
point an accusing finger at RBU for having not acted sufficiently to control
Inflation. It has done its bit.
It was good on the part of RBI to point to the
Government the need for Government’s
fiscal and administrative action to contain Inflation. RBI has stated
explicitly about this need many times. Government must act on Inflation,
leaving no stone unturned. That has not happened so far in any significant way
– but it must happen at least now. Government has gone ahead with some good
policy measures on the lines suggested by RBI, but much more needs to be done.
Given the present mood in the Government, this reform
and fiscal consolidation process will continue further now.
So – where is the RATIONALE for keeping the REPO &
REVERSE REPO RATES HIGH in this scenario?
CRR CUT is needed for enhancing liquidity in the system;
this is true; but, more essential is the RATE CUT to spur Growth.
Bankers will need liquidity more and would welcome CRR Cut
more. For them, RATE CUTS are almost revenue neutral. They can maintain their
margins any way. With some rate-cuts, while margins will still be maintained by
the banks at current levels, more borrowers may come to banks seeking credit.
On the other hand, for entrepreneurs and Buyers of
goods, RATE-CUTS matter more. For entrepreneurs any reduction in cost of
capital will mean greater incentive to invest in production. Since the rate of
return will move up, growth will be more. This means, for Growth, Rate-cuts are
more essential – even though CRR cut also is needed to ease the liquidity
conditions.
It is therefore felt, RBI needs to strongly bat for
GROWTH with both CRR Cut and a Rate-cut.
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