The Hindu Business Line : Monetary policy

This has reference to the article “Not yet time for tight money policy” (Business Line, October 24, 2009).The author has rightly analysed the present economic situation and reviewed the RBI’s monetary policy.

This is surely not the appropriate time for exiting the “easy money” policy, especially in the backdrop of the prevalent inflationary expectations.

This is because the economy is still in the process of revival and it will take considerable time before the country is once again on the appropriate growth track.

Also, as rightly pointed out, it is necessary to study the root causes of the present inflationary circumstances.

The present rise in prices — mainly food prices (food inflation) — can be attributed to poor harvests arising from the drought situation and cannot be explained by the classical definition of inflation — too much money chasing too few goods. The other factors that call for money control measures for tackling inflation, such as rise in oil prices, are non-existent, at least for now.

On the other side, growth in the economy has been really slow and investor confidence is still low. Fund-flows in the form of FDI is still weak and the investor sentiment is down. Hence, monetary control measures by the RBI such as a hike in interest rates will further aggravate the situation.

While the world is still reeling under recession it is necessary to create an internal climate conducive to growth. Also, such a money tightening exercise may hamper developmental and welfare measures by the government by increasing its cost of lending, leading to further increase in the fiscal deficit.

Amitava Banik e-mail

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Monetary policy