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Saturday, 17 September 2011 00:00
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If RBI’s decision to hike policy rates by 25 bps in the face of steadily deteriorating local growth conditions—and worse to follow, given the fact that the European crisis is still far from resolved—was inexplicable, the government’s actions are even more curious. And very clearly show the government and RBI are working at cross-purposes. As a newspaper, we have been in favour of eliminating petroleum subsidies since they put an exceptional burden on PSU oil companies and, apart from restricting their investments, they also drove out private players like Reliance Industries and Essar Oil. But raising petrol prices by R3 a litre just a day before RBI had to take a call on raising policy rates had to be a decision taken without much application of mind—while it raises inflation by a small amount (7 bps), it surely sent the signal to RBI that more oil price hikes were in the offing. Even worse, the decision to hike DA rates for government employees would have convinced RBI, if it needed any convincing, that a wage-price spiral was in the making.

Coming as it did a few days after the RBI Bulletin had a piece on how private sector investment was going to fall in the current year, the logic behind the rate hike is difficult to explain—if a 175 bps hike in the current year, and 325 bps in the full cycle, haven’t helped, it’s not clear what 25 bps more will do to curb inflation. Moreover, oil prices have definitely trended down and it seems difficult to see how commodity prices can stay at high levels, given the global economic situation. Also, as our columnist Surjit S Bhalla pointed out a few days ago, the hikes in procurement prices by government have played a big role in the current price spiral. The fact that the government does not provide prices on a seasonally adjusted basis also complicates matters as many argue there is a definite trending down of inflationary pressures. Possibly the fear of a withdrawal of dollars in the face of an uncertain global environment has guided RBI’s actions. Even so, it would have been better if the government and RBI had a coordinated strategy, not just to fight inflation but also to encourage investment levels to pick up.


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