Cautious approach

In its third bi-monthly monetary policy review of the current year the Reserve Bank of India (RBI) has again stuck to its cautious and conservative line of fighting inflation.

This was expected too, though there was hope in some quarters, as always on the eve of policy announcements, that there would be loosening of the stance. But the apex bank found no reason to accommodate those hopes and has left the repo rate and the cash reserve ratio unchanged.

The reverse repo will continue to be 7 per cent, and the marginal standing facility rate and the bank rate will remain at 9 per cent. These are the policy rates which act as the valves with which the RBI regulates the flow of liquidity into the economy.

There are valid considerations which weighed on the apex bank to be on guard on the policy front. Recent inflation figures had shown some signs of easing but Governor Raghuram Rajan obviously thinks they are temporary. The policy actually looks at a medium term scenario in which the inflation rate has to be restricted to 8 per cent by January 2015 and 6 per cent in 2016.

The performance of the monsoon, which will have a bearing on food prices, still needs to be watched. The policy statement sees more upward risks than ameliorating possibilities on inflation in the coming months. There is also a global factor which might come into play next year. If the US Fed increases interest rates next year, that will have some impact on all economies. India cannot afford to face such a situation in a state of high inflation.

The RBI has been more concerned with containing inflation than with encouraging economic growth with its policies. This has been the creed of RBI governors in the past and Raghuram Rajan has proved to be no exception. It is for the government to create the environment in which the RBI can use its monetary tools to ease the flow of credit into the economy.

But it cannot be said that the policy was completely rigid on credit. It has reduced the statutory liquidity ratio by 0.50 per cent to 22 per cent, which will enable banks to meet the credit needs made on them to some extent. There was a similar reduction in the last quarter also. But they do not change the apex bank’s overall adherence to a tight monetary policy.