Tags:
Journalism of Courage
The latest WPI wholesale price index numbers show that the inflation rate has fallen to nearly zero despite the fears the RBI still appears to harbour about price rise. The brakes applied to monetary easing in the last three months,notwithstanding the small cut we saw earlier this month,have meant that as inflation falls and as expectations about inflation fall along with it,real interest rates are rising. High real interest rates disincentivise investors from investing. The logic that the RBI should not cut rates today because at some point in the future this will be inflationary is flawed. It is normal for central banks to cut and raise interest rates according to business cycle conditions. The problem appears to be that the RBI is new to counter-cyclical monetary policy. Until now all it worried about,and devoted its entire firepower to,was the rupees exchange rate and how to handle the consequences of its actions on the forex market. Now even without doing anything on the forex market,market conditions require the RBI to move.
This new role appears to have caused the RBI to freeze up,apparently too scared to do what is required: after all,it has almost no experience in such a role. While caution is not bad per se,there is no place for caution when inflation has fallen to zero. Not only that,data suggests that it will fall further and we will soon see deflation. The argument that the consumer price index CPI is still high and therefore monetary policy should not be eased adequately is also flawed. Movements in the WPI reflect the price of tradables oil,commodities,metals,etc. These inputs into goods and services take some time to have an impact. The CPI thus falls with a lag compared to the WPI,as the effect of lower input prices is seen on final goods and services. Monetary policy is about expected inflation. To argue that it should not be eased because last month the CPI was high clearly shows that the role of monetary policy is not understood.
