The RBI plays an important role in Indian economy. It tries
to strike a balance between the twin objectives of controlling inflation and
accelerating growth. RBI has various monetary
tools to control inflation, like repo rate, reverse repo rate, cash reserve
ratio, statutory liquidity ratio and open market operations. The inflation as
measured by whole sale price index (WPI) had remained above or around 10% mark in
the year 2010 and 2011. To control this, RBI had gradually increased repo rate
from 4.75% to 8.5% and reverse repo rate from 3.75% to 7.5% from the beginning of
2010 to the end of 2011. The consequence of this action resulted in taming of inflation
but sacrificing growth. The year 2012 saw inflation coming down but still
remaining above the 5% mark set by RBI as a comfortable figure. Hence in 2012
RBI followed a wait and watch policy and reduced repo rate by only 50 basis
points from 8.5% to 8%. This was done because of pressure on the growth front.
The cash reserve ratio was also reduced to 4.25% to infuse liquidity into the
system and spur economic activity. The year 2013 started with a further
reduction in repo rate and with headline inflation touching to a 40 month low
of 5.96%, RBI in its latest monetary policy review on May 3, 2013 reduced the
repo rate from 7.5% to 7.25%. So far RBI has done a commendable job of striking
a fine balance between inflation and growth without succumbing to pressures
from political and business class. The future liquidity position, which at
present is slightly tight, will depend on the Government borrowing and spending
and credit and deposit growth rate of banks. The head line inflation which is
expected to come down will depend on the international commodity prices
especially the crude oil which constitutes a major bulk of our imports.
This really looks like a vicious cycle...is it that all the time we have to choose one between growth and inflation?
ReplyDeleteThe priority of RBI is to control inflation and bring it down to an acceptable level even if that means sacrificing growth. The second half of the last year saw moderation in inflation rate and touched the lowest figure in the month of March 2013. This gradual decline in inflation has prompted RBI to shift focus to growth.
DeleteWhile RBI is trying to manage inflation by controlling money supply, the real reason for the existence of inflation, which is supply inefficiencies is still being ignored by the government. The prices of basic commodities is still unmanageable because of supply side issues. Besides this, government spending is another cause for worry. Under these conditions, RBI seems to be the sole hope for the Indian economy, as the political class is too busy managing (or mismanaging) the fundamental issues.
ReplyDelete