RBI monetary policy: Time to intervene again?

“No two economists can ever agree on a same thing.” Governor of the Reserve Bank of India, D Subbarao, may choose to use the above quote to justify himself if he decides to do something out of the box when the central bank announces its monetary policy on November 2. Confronting him is the same concern that has been bothering him since mid-2009: high inflation coupled with fluctuating industrial growth – both of which are refusing to stabilise. For example, the industrial output figure, for the month of August, was at 5.6 percent – the lowest in 15 months. The figures came at a time when almost all – economists, government as well as agencies like the IMF and the World Bank – predicted about 9 percent growth this fiscal. The industry honchos were quick in their response and have asked the central bank not to hike rates further. The RBI’s tight monetary policy stance has pushed up interest rates for corporates as well as for retail customers, most of whom rely on loans or credit to buy vehicles or other consumer durables, believes the industry. However, other analysts say that looking at the runaway inflation it is imperative on the part of the RBI to make use of its available monetary and fiscal instruments to contain it. India`s wholesale price index rose 8.62 percent in September compared with 8.5 percent in August, while annual food inflation moved up a bit to 15.53 percent for the week ended October 9. The rise in WPI based inflation is a major concern compared to high food inflation which is primarily due to supply constraints. The RBI, which has been one of the most aggressive central banks in Asia on policy front this year, has raised its lending rates five times by a total of 125 basis points this year. The RBI increased rates mainly to cool inflation, following which the rate for its key short-term lending (repo) stands at 6 percent and borrowing (reverse repo) at 5 percent. A majority of investors expect the RBI to raise its rates by a quarter of a percentage point this time around and once more by the end of the fiscal year in March. Another major concern for the central bank is the lower-than-targeted loan growth. Credit growth for the fortnight ended October 8 was estimated at 1.2 percent, which is way below the 20 percent mark set by the RBI. This clearly means that there is a lower demand for bank loans and any rate hike by the RBI could further worsen this situation resulting in lower economic activity. China recently raised interest rates to cool the economy for the first time since 2007, risking a drop in growth rate. India’s central bank is also expected to go that way, but it will be interesting to see whether Subbarao, who is practically chained by the Central government, comes out with something unexpected to tackle the situation. By Anil Kumar Satapathy