RATES AND PRICES

The spectre of high inflation continues to haunt policy-makers. In May, the Reserve Bank of India had raised policy rates by 50 basis points. Last week, they were raised further by 25 basis points. As a matter of fact, this is the tenth time in 15 months that policy rates have been raised. Those who observe closely the way the RBI works have noted that in the last decade the central bank has never followed monetary stringency over such a long period. This is significant because the expectations were that the central bank Governor, D. Subbarao, would put his fingers on the pause button as far as raising policy interest rates were concerned. Mr Subbarao’s moves towards greater monetary tightening clearly suggest that he wants to control inflation at any cost. He had stated his position about six weeks ago when he said that the RBI would try to maintain “an interest rate environment that moderates inflation and anchors inflation expectations”. There is no guarantee that policy rates will not be raised in the near future since it is evident that the policy-makers have decided to use monetary policy to bring down and control inflation. The RBI is in no mood to listen to the argument that raising policy rates could adversely affect growth. There is always a trade-off between growth and controlling inflation. The RBI has chosen the latter and has accepted that a lower rate of growth in the medium to short run is not a huge price to pay if the demon of high inflation is to be tamed. High inflation has obvious political implications and results, and therefore a democratically elected government cannot afford to ignore persistently high prices. Industry has obvious reasons to be unhappy with the government’s policy of raising interest rates. But the RBI has pointed out that industry can always pass on the effects of greater costs (a fatter wage bill and higher input costs) to the consumers. The RBI commented that it was particularly concerned by this trend. The overall picture being painted by the RBI is a trifle gloomy: inflation needs to be controlled; this means a moderation of growth; and a warning hand on the shoulders of industry to stop it from raising prices unnecessarily. The result of this monetary tightening in terms of reduction of prices remains to be seen. The housewife, as distinct from the economist, would prefer to see the actual impact on her grocery bill rather than overall figures regarding inflation

The Telegraph