The Reserve Bank of India's (RBI) unrelenting effort of controlling spiraling inflation by repeatedly hiking key interest rates despite opposition from industry and other quarters, yielded results toward the end of 2011, as food inflation slipped below 1 per cent and headline inflation showed faint signs of moderation.However,the by product was decline in growth rate
Despite all this, RBI cannot afford to relax, as inflation would continue to remain a concern in 2012 and along with the Government, it will have to deal with slowing economic and industrial growth. The RBI raised the repo rate, at which commercial banks borrow funds from the Reserve Bank, seven times during the year, by 2.25 percentage points to 8.5 per cent. However, it was a different matter that the efforts of RBI Governor D Subbarao to tame inflation did not soften inflation in the immediate run and instead pulled down the economic growth rate and industrial production. Though food inflation declined from 16-17 per cent in January to less than 1 per cent in December, headline inflation remained near the double digit mark. Moderation was, however, witnessed toward the close of 2011 and there is a good possibility of it declining further in the new year. With inflation under control, Subbarao, who got a two-year extension one month before his first term came to an end, will have to focus on arresting the fall in growth and the decline in the value of the rupee. Another issue that troubled the RBI was the declining value of the rupee against the US dollar. The Governor reiterated the stated policy of non- intervention in forex markets to correct currency imbalances and looked the other way as the rupee fell to historic lows. During the course of the year, RBI was criticised for being directionless and its failure to come out with out-of- the-box solutions. For RBI, however, there was little option but to continue the tight money policy initiated in March 2010, to contain inflation. From January through October, Subbarao raised interest rates seven times to 8.50 per cent, even at the cost of ignoring the advise of the technical advisory committee. A dovish stance, however, did manifest in December. Significantly, RBI left both the bank rate (cash reserve ratio) and statutory liquidity ratio unchanged at 6 per cent and 24 per cent, respectively. As regards inflation, it declined to 9.11 per cent in November after it had crossed 10 per cent in September. It was 9.78 per cent in October. The saving grace, however, is the food price index, which slipped to a six-year low of 0.42 per cent for the week ended December 17 from 15.48 per cent a year ago. The inflation problem was aggravated by rising crude and commodity prices on one hand and increasing government borrowings and a widening deficit on the other. The falling rupee, too, added to the worries of the Government. Growth, unfortunately, became the biggest casualty during the year. While factory output barely managed to remain in the green zone in September, it nosedived to minus 5.1 per cent in October. Last week, the Governor admitted that the GDP will not clip above 7.6 per cent this fiscal. Despite all this, 2011 was one of best years for retail banking customers as the RBI unveiled a slew of radical reforms by forcing bankers to give customers more by way of higher interest rates on savings deposits. The Reserve Bank forced the banks to reduce charges on various services like pre-payment of loans and closure of accounts. On May 3, RBI hiked interest rate on savings deposits by 0.50 percentage points to 4 per cent. The masterstroke, however, came on October 25, when the RBI freed the last bastion of the regulated interest rate regime -- savings bank interest rates. Following the announcement, several smaller banks raised savings bank interest rates. The larger ones, however, have yet to respond, but what is certain is that consumers will benefit as a result of the initiative. In another customer-friendly measure, in October, RBI asked bankers to abolish pre-payment penalties on home loans, a direction many lenders implemented. Banks charge 4-6 per cent for pre-payment of loans. The biggest casualty of 2011 was the rupee, which declined sharply, especially toward the close of the year. Although the year began with a stable rupee and a positive outlook, things took a turn for the worst after global agency Standard and Poor's downgraded US sovereign debt on August 5. The rupee started falling against the US dollar after the downgrade and the euro zone crisis only added fuel to the fire. Moreover, foreign investment inflows of $922 million in April-October were a trickle in comparison to the $27 billion achieved a year ago. In the backdrop of these developments, the rupee kept plunging to hit an all-time low of `54.30 to the dollar on December 15, though it did stabilise a bit towards the fag end of the year.
The Pioneer
