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Journalism of Courage
The latest figures for industrial production show a slowdown to 5.3 per cent in the month of January. Following slow growth in November and December, this is a matter of concern. This, however, is not surprising given the tight monetary policy being followed by the RBI. Thanks to the hikes in repo, reverse repo and the cash reserve ratio, there was a rise in the lending rates of banks beginning in March 2006. This hike was meant to counter the impact of the RBI8217;s intervention in the foreign exchange market that was shoving rupees into the system. The policy of sterilised intervention was not a sustainable long-term solution but unfortunately the RBI, used as it was to a much less open India when it could manipulate the exchange rate, chose this instead of a framework that allowed rupee flexibility. While keeping the exchange rate stable, the RBI pushed up interest rates. Moreover, there was a huge instability in interest rates. This meant that market participants and households were forced to pay higher cost of capital. Instability and uncertainty meant they were not able to plan their expenditures. This is showing its effect on lower growth.
As this newspaper has been arguing, tight monetary policy is hurting growth. The US economy is now showing signs of slipping into a recession. In the bad old days when India was much less integrated with the world economy, it was possible to believe that we would not be affected. Today, it will be a big mistake to think so. We can tackle both slower growth and inflation if we correct our policy of pegging to the US dollar. In the last one month, the RBI has actually engineered a depreciation despite the signs of prices going up.
