Ineffective policy

The Reserve Bank of India has stuck to its tight monetary policy by raising the short-term policy rates by 25 basis points. It has, in its latest review, raised the repo and reverse repo rates to 6.75 per cent and 5.75 per cent respectively and there was no surprise as the apex bank had given indications of its hawkish thinking many times in the past. The hikes, which have been resorted to eight times in the past one year, underline the concern over inflation which the RBI considers as the major challenge. In spite of all RBI and government actions inflation rose to 8.3 per cent in February.

What is worrying is that persistent tinkering with policy has no impact on the inflation curve. Food prices, which drove overall price index to high levels, have cooled off now. But other factors and the inflationary environment have remained largely insensitive to policy action. There is a recognition of this in the RBI’s position. The apex bank has noted the volatility in industrial production and the weak performance of the capital goods sector. The limits to the impact of monetary policy prescriptions are being tested now. Government policies have not helped much and an adverse international climate has added to the problem. Global oil prices are ruling above $115 per barrel, with chances of further escalation. The union budget has not earmarked adequate amounts for the oil subsidy. In fact the allocation for other subsidies and social sector commitments are also inadequate and the so the government will have to go beyond its budgeted expenditure. This will create additional pressures on the fiscal situation.

Though there is no revision of GDP growth figures, the rate hikes can create worries on that score. An increase in interest rates will make capital costlier and hurt consumer demand and the competitiveness of the industry. Slower growth can also lead to a fall in tax revenues and result in higher fiscal deficit. The mishap in Japan may affect economic recovery in the US and elsewhere. Exports and foreign investment prospects may be hit because of this. The erosion in the government’s credibility and standing will be another negative factor. Therefore the situation on the price front and the larger economic scenario are not the best, in spite of the RBI’s best efforts.

Narendra Modi or Rahul Gandhi? Who will win the battle royale of the Lok Sabha Elections 2019

Get real-time news updates, views and analysis on Lok Sabha Elections 2019 on 

Like us on Facebook or follow us on Twitter and Instagram with #DHPoliticalTheatre for live updates on the Indian general elections 2019.

Liked the story?

  • 0

  • 0

  • 0

  • 0

  • 0