The governor moves ahead

Monetary purists may wonder why the Reserve Bank of India opted to bring the bank rate down by 25 basis points, 0.25 percentage points in layman’s terms, and promise to release an additional Rs 3,500 crore of cash into the system after June, through a 25bps cut in the cash reserve ratio (CRR), when it confesses, on the one hand, that supply of credit is not a constraint on growth and, on the other, expresses concern about inflation. Economists believe that an excess of cheap money can push prices up. The central bank is not yet worried about that kind of inflationary pressures. In the more open economy we now have, saddled as it is with adequate excess capacity in the system, an increase in the availability of cheaper credit, RBI thinks, can stimulate growth without stoking inflation. The one source of price rise in recent months, namely the petroleum sector, is likely to see a reversal of trends thanks to the denouement of Gulf War Two. The only thing that can go wrong is the monsoon. A weak monsoon made worse by foodgrain price hikes can stoke inflation. It is to provide for this contingency that the RBI has postponed the reduction of CRR to mid-June. It is also for this reason that the RBI has warned the government against lax fiscal management and populism in setting administered prices.

In other words, while issuing an early warning on inflation, the RBI is also saying that sensible economic policies can limit the damage. In a similar vein, RBI has also cautioned banks and corporates against pursuing risky practices that could destabilise the money markets and the financial system. The annual monetary and credit policy statement of the RBI is a balanced analysis of the current macroeconomic situation and the state of the nation’s financial and banking system. It underscores the latent growth potential but cautions, both the Centre and the states, against wrong fiscal governance. Consider the section on the external sector. The RBI exudes understandable confidence about the robust external profile of the economy, even while warning companies against unhedged risks and against one-way bets in the foreign currency market. On non-performing assets, the RBI compliments banks that are using the teeth provided by the securitisation act to improve their bottomline but cautions against killing the goose that lays the golden egg.

RBI is right to suggest that higher growth is important and ought to be stimulated through judicious policy intervention but not at the cost of the fiscal viability of the government and the financial health of the banking system. The central message of the new credit policy seems to be that if the government can keep inflation rate within manageable limits, RBI is ready to help with a pro-growth stance.