The Hindu Business Line : Inflation lessons

FOR THE MOMENT, the Centre seems to prefer the fiscal ploy to a monetary gambit in its efforts to contain the sharp rise in inflation rate to a four-year high of 7.96 per cent. That seems sensible as it may not thwart growth, which, in turn, could compensate a rise in fiscal deficit. International crude prices are climbing uncomfortably toward the $50 per barrel mark and are a given constant about which the Government has no say. Initially, it got public sector oil companies to foot the rising petro bill and later thankfully switched over to cutting Customs and excise duties, leaving no mark on the consumer price indices, which have been trailing the wholesale price indices. Recent reports in the international media suggest crude prices cannot be on the rise for long as it will impact the US economy with ripples felt by the rest.

Good rains over most parts of the country since August have lessened the fear of a drought and eased inflation worries somewhat. The final word will have to wait till September 30, when the monsoon ends but many feel the kharif crop will not be a total write-off. The needless all-India truckers' strike could push up prices and the war-rooms set up by New Delhi do not impress as the railways may not be able to step in quickly to haul vegetable and other cargo to consuming centres. Going by experience, the present truckers' strike too may not last long. At the worst, this has a nuisance value and the Government would do well to stand firm. In the event, the economy can be said to be doing well with core sector growth in July placed at 7.4 per cent.

Financial markets have turned quite nervy with the yield on the benchmark 10-year 2014 ruling at 6.56 per cent. Bond players, notoriously short-sighted and always looking one-way, do not see yields falling in the coming months while bankers are waiting for the RBI to make the first move. In private, most predict an end to the low-interest regime, which helped them rake in crores as trading profits. The RBI has in recent auctions opted for higher cut-off yields, perhaps to prevent rupee liquidity from chasing goods. The one-day repo, seven-day repo and the Market Stabilisation Scheme run by the RBI should have trapped around Rs 1,00,000 crore of surplus funds, suggesting easy liquidity and a not-so-keen desire on the part of bankers to fund capital investments.

Quality corporates raising cheap funds from banks at sub-PLR rates may now revert to their open credit limits with their banks if yields continue to climb. The prime lending rates of banks are in the 10.25-11 per cent range while deposits, on an average, cost around 4 per cent, with most borrowers, including farmers, charged an interest rate of 11-13 per cent. Bankers are not reporting fresh investment proposals while the Finance Minister, Mr P. Chidambaram, has to coax and sometimes chivvy them into lending to the farm sector and small-scale industry. Over the last three years, banks set store by trading profits. From now, bankers will have to revert to the first and forgotten rule of banking — lending to create assets, as the case for marking up lending rates is indeed thin.