Tuesday, February 5, 2013

RBI: Q3 MONETARY POLICY REVIEW

low growth or inflation; it was a tough choice to be made by the RBI Governor. The problem is, despite a quarterly review of the Monetary Policy, he’s still to make the choice, says Manish K. Pandey

As per the Central Statistical Organisation, the GDP grew by 7% in H1, FY2010. So if overall expansion for FY2010 is targeted at 7.5% (not to forget that RBI expects Q3 growth to be lower than the 7.9% attained in Q2), it would require the economy to grow by over 8-8.5% during Q4, FY2010, which at present seems be an unlikely phenomenon. Raison d’être: RBI’s growth assumption is based on a flat growth of the agricultural sector, but given an expected 16% fall in kharif crop output this year, the sector’s contribution to GDP is estimated to fall by over 5%. Moreover, the current momentum in the industrial and services sectors don’t appear to be compensating the fall. So, in all likelihood, the chances of Indian economy clocking a 7.5% growth this fiscal, is as good as the Indian football team making it to the FIFA World Cup this year (India was eliminated in the first round of the FIFA 2010 World Cup Qualifiers by Lebanon)! Perchance a miracle happens, and RBI’s own growth and inflation projections materialise, the latest CRR hike will still prove insufficient to tackle the situation! By increasing CRR, RBI has explicitly shifted its stance from “managing the crisis” to “managing the recovery” (as Subbarao puts it), but then at the same time, one should not forget that amidst concerns about inflation, the recovery is yet to fully set in. “A tightening of monetary policy when the economy is beginning to get out of the downturn (and credit growth & investment demand are still anaemic), will surely have an adverse effect on investment demand even if banks maintain lending rates,” agrees Rajiv Kumar, Director & Chief Executive of ICRIER.

Subbarao’s worry is understandable as over the past three quarters, food prices have risen at the fastest pace in the last one decade. From a low of 1.2% in March 2009 (of course, it fell to a negative 1.74% in August 2009 due to the large statistical base effect), the WPI inflation has accelerated to 4.8% in November 2009 and further to 7.3% in December 2009. Even the consumer prices have risen by around 13% as compared to a year earlier. In fact, weekly WPI data on primary articles indicate that primary food articles prices have increased by 17.4% (y-o-y) for the week ending January 16, 2010. But then, food inflation can’t be contained directly by a hike in CRR, since it’s purely a supply side phenomenon (thanks to last year’s drought & poorly managed logistics). That makes this fight against inflation a little different and more difficult than perceived previously.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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