Playing safe

Playing safe

These hikes added 350 basis points and had the unintended consequence of slowing down the economy already hit by other macro-economic problems and an unfavourbale external environment.

The apex bank has now retained the status quo on repo or lending rates, as promised in its second quarter policy statement in October. Though its expectations at that time have not come true, it probably had to effect a pause. There was even a view that the RBI should go beyond a pause and actually start reversing the interest rate hikes. But it obviously wanted to play safe when matters are still not under any semblance of control.

The RBI had a difficult choice before it. Inflation has shown signs of moderating from its peak levels but it is still above 9 per cent. The entire dear money policy was meant to bring inflation down to acceptable levels. But the goal of 7 per cent inflation by the end of the financial year is difficult to achieve.

Though food inflation has registered a significant decline, there are other difficult indicators. The depreciation of the rupee and the increase in crude prices are likely to fuel the inflationary spiral. The likely increase in government expenditure in the coming months and its impact on fiscal deficit also have to be reckoned with.

In spite of all these, the RBI felt that the impact of the rate hikes on the economy has been severe, with industrial production even showing a negative growth in October. There is a severe credit crunch and corporate investments and tax collections are falling. Since the monetary policy tweaking had almost reached its limit, the bank may have felt it had to halt before the slowdown gained further momentum.

The RBI’s projection of a 7.6 per cent growth for the economy this year seems to be in doubt. That may be the reason why it has stated that from now monetary policy actions are likely to reverse the cycle, responding to the risks to growth. That may be an indication that the first rate cut after many months is likely to happen in its January policy review. However, it may still be not the last word because inflationary pressures are still strong.

DH Newsletter Privacy Policy Get top news in your inbox daily
GET IT
Comments (+)