By increasing CRR, the central bank has explicitly shifted its stance from “managing the crisis” to “managing the recovery” (as Subbarao puts it), but then at the same time one should not forget that amidst concerns about rising inflation, the recovery is yet to fully take hold. As such we shouldn’t be surprised if strong anti-inflationary measures, while addressing one problem, may aggravate another, particularly by deterring private investment and consumer spending. “A tightening of monetary policy when the economy is beginning to get out of its downturn and credit growth and investment demand are anaemic will surely have an adverse effect on investment demand even if banks maintain lending rates,” agrees Rajiv Kumar, Director & Chief Executive, ICRIER.
No doubt Subbarao’s worry is understandable as food prices are rising at their fastest pace in the last one decade. From a low of 1.2 per cent in March 2009 (in between it also turned negative in August due to the large statistical base effect), the wholesale price index (WPI) inflation has accelerated to 4.8 per cent in November 2009 and further to 7.3 per cent in December 2009. Even the consumer prices have been rising around 13 per cent from a year earlier for months. In fact, weekly WPI data on primary articles indicate that primary food articles prices have increased by 17.4 per cent (y-o-y) for the week ending on January 16, 2010. But then, one should know that the food inflation can’t be contained via CRR hike directly as it’s purely a supply side phenomenon (thanks to last year's drought and poorly managed distribution chains). Therefore, that makes RBI’s this fight against inflation a little different from the previous ones.
Further, the reversal of monetary accommodation cannot be effective unless the government reduces its fiscal deficit in order to make way for better credit growth and help RBI in the tightening process. In fact, the combined union and state deficit is projected to be around 10 per cent of GDP during this fiscal. However, if industry sources are to be believed then RBI doesn’t seem to get the much-needed support from the government on this front. As per them, the government is likely to bulk up expenditure in the national budget due this month, which means more money getting pumped into the economy in the form of infrastructure spending, food subsidies, et al. If these arguments are true, then the CRR hike, as several critics too believe, is only a political response to the expectation that RBI should do something, rather than a commitment on its part that there would be any real impact to this monetary stance.
No doubt Subbarao’s worry is understandable as food prices are rising at their fastest pace in the last one decade. From a low of 1.2 per cent in March 2009 (in between it also turned negative in August due to the large statistical base effect), the wholesale price index (WPI) inflation has accelerated to 4.8 per cent in November 2009 and further to 7.3 per cent in December 2009. Even the consumer prices have been rising around 13 per cent from a year earlier for months. In fact, weekly WPI data on primary articles indicate that primary food articles prices have increased by 17.4 per cent (y-o-y) for the week ending on January 16, 2010. But then, one should know that the food inflation can’t be contained via CRR hike directly as it’s purely a supply side phenomenon (thanks to last year's drought and poorly managed distribution chains). Therefore, that makes RBI’s this fight against inflation a little different from the previous ones.
Further, the reversal of monetary accommodation cannot be effective unless the government reduces its fiscal deficit in order to make way for better credit growth and help RBI in the tightening process. In fact, the combined union and state deficit is projected to be around 10 per cent of GDP during this fiscal. However, if industry sources are to be believed then RBI doesn’t seem to get the much-needed support from the government on this front. As per them, the government is likely to bulk up expenditure in the national budget due this month, which means more money getting pumped into the economy in the form of infrastructure spending, food subsidies, et al. If these arguments are true, then the CRR hike, as several critics too believe, is only a political response to the expectation that RBI should do something, rather than a commitment on its part that there would be any real impact to this monetary stance.
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