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Millennium Post

Rajan shows no innovation

The Reserve bank of India has delivered another ‘more of the same’ credit policy. It has increased repo rate in the light of inflationary trends, particularly in view of the anticipated impact of pass-through of exchange rate depreciation of the last couple of months and also the prospective corrections in oil prices by the government.

So it is in effect passing through the burden of price stabilisation to Indian industry. That is happening, even when price pressure is emanating from the macro-economic developments such as built-up imbalances of oil price correction or rupee exchange rate.

Look at what the policy statement mentions about the possible price threat: ‘With the more recent upturn of inflation, and with inflation expectations remaining elevated anticipating the pass- through of exchange rate depreciation and on-going adjustment in administered fuel prices, it is important to break the spiral of rising price pressures.’

Admittedly there are some pressures on prices. The detailed inflation figures show what are these pressures. Food articles prices are rising by anywhere around 15 per cent-20 per cent on an average while some items prices are rising at astronomical rates so to say. Onion being one of these.

We are also witnessing the fact that food grains prices are also rising. Rice price rising by around 20 per cent and wheat prices by 6 per cent. This is intriguing. The buffer stock of both rice and wheat are embarrassingly large. While normal buffer stock requirements are of the order of 20 million tonnes, the actual is around 55 to 60 million tonnes. This is more of a burden than an asset.

That is on account of the carrying costs of such large buffer stock. Instead, by paced out distribution of the excess stock in proper time sequence the prices of rice and wheat could possibly held down to stable levels. This is not being done, despite the fact that those in a position to take such decisions, are only too aware of these.

RBI certainly cannot take decision on food grains distribution by government. But RBI can at least emphasise that part of the responsibility for price stability also rests on the government. RBI can be inflation focussed, as is often mentioned with high praise in commentaries on the central bank.
However, focus should not mean concentrated effort at flogging the wrong horse.

All that RBI is doing is raise interest rate (repo rate) in copy book style in the context of the inflation figures. The consecutive rate actions have admittedly doused manufactured goods prices. The inflation rate of manufactured goods is hovering at around 2.5 per cent.  However, the food articles inflation remain stubbornly high, this being more dependent on supply side dynamics.

RBI had earlier considered the core inflation figure –which is basically manufactured non-food goods inflation—for inflation targeting. Now it appears the RBI is focussing not on core but on food articles inflation which is reflected more in the consumer price index (CPI).

With the current hike in repo rate, the new governor, Raghuram Rajan, has in effect taken away the accommodation that his predecessor had given. Subbarao had in between brought down repo rate by some 1.25 per cent. In his nearly two months’ tenure, Rajan has raised it by some half a percentage point.

Rajan is reported to have observed to the former governor that he was following only his path. It will be interesting to see how it should take for Rajan to develop the same kind of relation with the finance minister as Subbarao had towards the close of his tenure.

He has of course sought to address the other concern about the overall financial situation. He has taken two steps to augment liquidity in the system. First, Rajan has cut the interest rate on marginal stranding facility for banks. He is also raising the overall limit for additional liquidity through auction of securities. These two measures should ensure more funds in the system.

As such, the worse part of liquidity shortage appear to be behind. As the statement itself notes, withdrawal under the MSF has come down drastically from mid-September when liquidity shortage was at its peak following squeeze in the light of sharp depreciation in rupee exchange rate. That situation being over, fresh liquidity injection would help stabilise the shorter end of the market.

However, governor Rajan’s two policies are in fact too cautious. These do not reflect any proactive approaches that were expected from a person with global exposure and financial elan.  Maybe, the fault lies more in expectation than in the execution of a policy in the current situation. But surely this is not the kind of approach that will bring a spring back into the economy.
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