JOIN USFearing a major negative impact on the economy, the immediate reaction of the stock markets to RBI’s new monetary policy was one of despair. Though the RBI did not make any changes in the major policy rates like bank rate, repo rate, reverse repo rate and CRR, a closer study of the other changes suggests that the Central bank has given clear indication to the end of easy monetary policy. When Indian economy was slowing down due to a ripple effect of the global financial crisis, the RBI for the last nine months or so was following a loose monetary policy. It injected more liquidity in the system, lowered interest rates and made borrowing easy.
Now that the economic crisis is under control, industrial growth rates are becoming peppy, consumers are returning to market, stock indices had handsome gains and prices are rising, the RBI has hinted at tighter monetary policy. Future moves will be aimed at a balancing between growth and inflation. The RBI has made banks to invest more in the government bonds, made it more expensive to lend to commercial real estate, asked banks to provide more funds for bad loans and withdrew special funding facility from banks to mutual funds and NBFCs.
The RBI has admirably made it clear that it will not encourage a build up of asset price bubble and a stock market bubble with borrowed money. Though perceived as counter-productive, the RBI is right in tightening the purse string. While the economic stimulus is still in force, two countries — Australia and Israel, have already raised interest rates. RBI could be the next to follow. Its concern on inflation is genuine as inflation may touch six per cent by March next. Prices of all agricultural products (pulses, sugar, vegetables, etc) are already very high. Poor rainfall has made the situation worse as agricultural output is likely to drop further. While all these are true, the RBI should not push its measures to such an extent that credit flows to industry and business dry up. Though the recovery has just started, it is still on a feeble footing. Let us no forget that economic activities need money and the country’s GDP growth and employment are directly linked to it. Banks must be encouraged to lend at reasonable rates where the funds are needed.