Stay the course

The Reserve Bank of India,the countrys paramount monetary authority,is to conduct its regular review of monetary and credit policy on Tuesday. On the face of it,there are several different actions which RBI governor Subbarao could announce. The policy rates could be raised sharply,or gently. There could be no change announced immediately,but the governor could indicate to observers,through his grave manner as he discusses inflationary pressure,that there might well be one before the end of the year. Or there might be no change. Or,of course,technically,monetary easing might be pushed forward,and the rates cut further.

But this apparent plethora of options in fact conceals a binary choice. Does the Reserve Bank believe that inflation is the concern that currently should be paramount? Or does it believe that the recovery of Indias growth path is the most pressing problem? And within that is a subsidiary question,equally relevant: which of those two things does the RBI actually think it has a shot at controlling? The truth is that,for all the concern that is justifiably being voiced over inflation,the source of that is food price inflation. Under no reasonable permutation of economic forces does a change in policy rates transfer with any efficiency into lower food prices,and thus affect the component of inflation that is causing political concern. Our vegetables,our meat and our cereals are more expensive for reasons that are mostly supply-specific. Short of a massive,counter-productive demand effect from a monetary contraction,food price inflation will not ease.

We are left,therefore,with signals,not reality. Does the RBI wish to signal that inflation is more important than recovery? That is where the battle must be fought; and,if recent data is properly examined,the argument for sustaining loose money makes itself. Reports of recovery are greatly exaggerated. Industral data might have appeared optimistic,but the cheeriness vanishes if basic statistical procedures,such as seasonally adjustment,are performed. Policy rates below 5 per cent continue to translate into actual rates for prime lenders that are more than six per cent higher. Those are shocking numbers for a developing country looking to mobilise capital. Simply put,they must fall. The RBI must realise that to return India to a higher growth path,it must stay the course.