The Hindu Business Line : There’s life beyond repo rates, CRR

‘Exit’ fever is gripping the RBI. It’s plainly uncomfortable with current monetary conditions — surplus liquidity in the banking system, low policy rates and lower inter-bank rates.

Is there all to it? Reading and listening to the media and erudite speeches of central bankers, one would think we have been reduced to just a couple of degrees of freedom in policymaking — tinkering with interest rates and liquidity. Nothing else to do.

Have we involuntarily tied our hands, bound our feet?

The RBI’s angst is understandable. It’s damned if it does and damned if it doesn’t. Sticking with current policy risks inflation, while tightening prematurely could bring the house down.

Any number of ‘I told you so’ sayers are waiting on the sidelines, waiting for the stumble. Complicating matters is the Government’s clear bias for the continuation of soft policy.

Stifling inflation

Is more clarity possible? The Government’s and the RBI’s goal is obviously to stifle inflation without stifling growth.

On the key front of exchange rate management — which is a critical component of monetary policy — the score is a big ‘F’.

The rupee’s entirely unjustified and artificial strength is the equivalent of significant policy tightening for large swathes of manufacturing and services, which are, in fact, the mainstays of the recovery.

The Fords, Nissans and Hyundais, which are making India the global hub for small car exports — a recent report in The Economist talks of India becoming the world leader in this, replacing no less than Japan and South Korea — need no worse punishment. Nor do the job-creating companies such as Infosys, TCS and Wipro. It’s difficult to imagine greater insensitivity to the economy’s interests. We seem to be determined to drive away or destruct any thing which adds real value.

Hard-won business successes in tough global markets are at stake. We grudge them a competitive currency.

The next thing to realise is that goods inflation is less dangerous than asset price inflation. The former can be ‘supplied’ away, given time.

The ‘other’ inflation, which never shows up in price indices — so ‘pure’ are our inflation measures — is the bigger threat, because it gives rise to debt-financed speculation in asset markets.

Policy must differentiate between the two kinds of inflation.

That might involve discouraging or making credit costlier or mandating more equity in lending for bubble-prone assets.

The range of policies and instruments must widen considerably beyond repo rates and reserve ratios.

There’s life beyond bond yields, foreign exchange and foreign investment in equities.

Until we recognise that the real economy should be the focus, we run the risk of getting our priorities distorted and our policies terribly wrong.

More Stories on : CRR & Bank Rates | Financial Scan

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Muthoot Pappachan group launches card-based facilities

AP Grameena bank to use IBM tech platform

Re strengthens further

Rupee nears key resistance

Max New York aims at growth in new biz premium

Postal Life Insurance

Mixed reactions from bankers

There’s life beyond repo rates, CRR

RBI panel for replacing prime lending rate with base rate

SBH profit rises 27%; net NPAs increase in Q2

Call rate ends lower