|RBI’s message to finmin|
|Wednesday, 27 July 2011 00:00|
If the country’s stock markets fell 353 points (they fell 463 points in May when rates were hiked 50 bps) after RBI announced its shock decision to raise the repo rate from 7.5% to 8%—the markets were looking at a 25 bps hike—this is for two reasons. One, RBI has sharply increased the inflation target for the year, from 6% earlier to 7% now—so this means, RBI is echoing the government’s view that inflation may probably even rise a bit more before it starts to fall. Which also means it is by no means certain this is going to be the last rate hike. Indeed, some of the factors pointed to by RBI, primarily a QE3-type stimulus, suggest there may be more rate hikes. Two, and more worrying, is what RBI is saying on GDP growth. While RBI has kept to its 8% GDP growth figure, it’s difficult to see how this will happen if the only way to battle inflation is to lower demand—RBI seems to set store by the good export performance but even the commerce secretary is on record saying he sees tough days ahead. RBI’s report, in any case, documents falling credit from all sources, including capital markets, to the commercial sector in the year’s first quarter.
More interesting is what RBI has to say about the government’s role in creating this inflation. First, RBI points to the hike in petroleum product prices that will lead to a 100-plus basis points hike in inflation—since this took place with a lag, and R1,00,000 crore of oil subsidies still remain, RBI says this will continue to add to inflation. RBI also talks of the hikes in MSPs of rice and pulses that have been increased significantly; ditto for the coal prices that were hiked in February. While talking of fiscal slippages, RBI adds, “Fiscal consolidation is therefore critical to managing inflation”. There is also the overall policy paralysis that has prevented fresh capacity from coming up. The finance minister would do well to read the message in RBI’s policy.