Friday, October 17, 2008

Easy, Sir, the strain is on us!

Rate hikes alone can’t tame inflation. It’s time for some real action at the fiscal end too...
Given a chance, he would have been India’s hope (may be the only one) at the Olympics! No doubt, the apostolic zeal with which Yaga Venugopal Reddy, Governor, RBI, has been power lifting India’s monetary burden, he could have easily won India a Gold at the ongoing Beijing Olympic Games. Consider, for instance, his latest monetary stance (first quarter of FY 2009) and the uphill push, yet again, to the overnight lending rate (Repo) and cash reserve ratio (CRR). It has certainly been sterner than expected. “While we were expecting only a 25 bps hike in the Repo or the CRR by the RBI, this move of a 50 bps Repo rate & a 25 bps CRR hike has come as a surprise. Our expectation was keeping in view the past monetary tightening by RBI, which have started to reflect in the tempering GDP growth rate and IIP data,” Hitesh Agrawal, Head of Research, Angel Broking tells B&E.

No doubt, Reddy has played by the book – rates should rise with rising inflation! RBI has already hiked CRR by 125 bps and Repo by 75 bps in FY ‘08. In fact, many anticipate the rate to further climb to between 9.25% & 9.5% during the next quarter, as they tag inflation at around 15% by October end. So, the stance by Reddy definitely makes sense. However, when it comes to results, he still seems to be at square one.

While inflation remains unchanged (at 11.98% on a y-o-y basis & has hit a 13-year high), growth, however, has slowed down. Even the M3 y-o-y growth at 20.5% still remains obstinately above RBI’s comfort zone of 16.5-17%. Moreover, it’s the buoyant commodity prices (part of the global inflation congregation) which are affecting wholesale price index. So in such a scenario, it’s a little difficult to say whether monetary tightening alone would bring down headline inflation. The only thing it will affect will be the growth and investment scenario in India. Even according to the ET Intelligence Group, the growth in investments from cash flow for the top-50 companies, that nearly tripled all through FY ‘07 (a whopping 180% growth) is moderating (19%).

In addition, swift interest rate hikes would inevitably debilitate India’s competitiveness. Even Moody’s Investors Service says that risks confronting India’s economy have grown, though not yet to the extent of threatening the government’s Baa3 foreign currency and Ba2 local currency ratings. “Higher oil prices and the lack of adequate fiscal policy reactions amidst high pent-up price pressures are putting the burden of macro-economic adjustment on the monetary authorities... policy as well as market interest rates could rise, & sharp deceleration in growth may follow,” avers Aninda Mitra, VP & Sr. Analyst, Moody’s Sovereign Risk Unit. Even RBI has lowered GDP growth projection for FY ‘09 from 8-8.5% to 8% (its weakest since 2004).

No doubt, inflation based on WPI has risen significantly in the last six months, but this has more to do with supply side constraints. A further hike could choke off growth & sow the seeds of stagflation. So, it’s time that Reddy should step off the weight training a bit & let the earlier two hikes in repo and CRR rates show up in the system. Moreover, the goverment should realise that the solution lies in fiscal and supply side management. Else the overburden would once again leave India with nothing but empty hands!

For Complete IIPM Article, Click on IIPM Article

Source :
IIPM Editorial, 2008
An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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