Tags:
Journalism of Courage
The Reserve Bank of India has hiked interest rates by 25 basis points. This is certainly welcome; though the RBI should have taken a more aggressive stance against inflation,and hiked rates by 50 basis points. This would have been more in line with their analysis a day before that suggested that high inflation is a risk to growth. Further,their forecast of inflation has gone up,and credit growth is higher than RBIs target. The role of monetary policy is not to address prices of those items that are short in supply,but to prevent a spillover into the general level of inflation,and into higher inflationary expectations. In this light,since output growth is above expected levels and capacity utilisation is near full,the main risk to the economy is higher inflation and not lower output growth. Therefore,the stance of monetary policy needs to be aggressively anti-inflationary. In the short run a very marginal reduction in GDP growth will not be unacceptable to the Indian economy,given the need for longer-term
price stability.
While a simplistic analysis may suggest that interest rates have no role to play when prices are rising due to rising food prices and therefore nothing should be done about it,the RBI has correctly,in its analysis,agreed that monetary policy has a role. This position is a considerable improvement over the stance RBI took last year when,in a number of speeches,the RBI governor argued that it was not giving priority to inflation control because inflation was being led by higher food prices. It is welcome that RBI has moved beyond the simplistic analysis it offered earlier. In the face of persistent and moderate inflation,sophisticated analysis and expertise is a very important element of policy formation. As the Indian economy transforms to a market based economy with business cycles,the RBI and government need to put greater focus and resources on such capacity.
