A breather

The RBI has contrary to anticipations relaxed its guard for the first time since inflation-combating governor Raghuram Rajan took office.

The rationale for keeping interest rates steady on Wednesday, as opposed to the 25 bps hike which RBI effected in its last round of monetary tightening, is the softening trend in food inflation and improvement in India’s external balances. And, by presciently recognising the risks of tapering by the US Federal Reserve, which in the event happened late on Wednesday, the RBI attested its commitment to managing adequate systemic liquidity. There might be some rationale to RBI’s food disinflation hopes as prices of pulses and a few other protein foods like pulses have softened, though prices of staple foods like rice, wheat, onions and potatos, have not stabilised enough for comfort. Inflationary pressure is still the larger trend which RBI has preferred to study further.

GDP growth has been pegged 4.7 per cent in fiscal 2014, and the lacklustre growth of manufacturing and services, not to mention the IIP deceleration of over 1.5 per cent, does warrant a vision beyond inflation firefighting. Here, a trim-down of the earlier interest rate hike would have helped industry and banks alike. But the dangers of NPAs spiralling of control and RBI’s proposals to pre-empt delinquencies seem to have gone down well with state-run banks. The government has taken tentative steps to clear pending projects worth over Rs 4,000 crore and is keen to expedite new projects like the Tesco retail plan which received quick clearance. One more interest rate hike would have been an overkill, while an interest rate reduction, perceivably hasty. Hence, Rajan opted for pragmatism to balance out hope, which seems reasonable.

Rajan’s confidence that vegetable prices will fall further will hopefully not be misplaced. Past price falls of vegetables and cereals have not been sustainable enough to boost consumer confidence and are unlikely to be as long as the procurement, storage and final transaction mechanics are regulated and refined. Agricultural Produce Marketing Committees (APMCs) have been plagued by corruption and exploitation across their procurement and supply chains. Commissions paid to middlemen at the mandis, transport and storage expenses often add up to more than 50 per cent of the final prices of vegetables. The UPA government has little clue to improving agricultural productivity. These are factors the RBI must consider in its next policy round.