RBI’s cautious stance on managing inflation is all the more welcome
The results are out. “Curbing inflation remains the highest priority for the Reserve Bank of India.” Amidst heightened global uncertainty, the Governor of Reserve Bank of India, Yaga Venugopal Reddy, maintained status quo on all policy rates thereby avoiding any tit-for-tat interest rates cut after the Fed slashed rates by 75 basis points. It is an expected move as the government does not want to couple robust economic growth with high inflation. Considering the factors in the domestic & global economy, the move centring on liquidity, curtailing inflationary pressures & managing growth are very much in line. Banking analysts are of the view that RBI’s emphasis on price stability & well anchored inflation, ensures a monetary & interest rate environment, which is conducive to the continuation of the current growth momentum. They feel that maintaining status quo is indeed the best thing they could have done. However considering the rate differential, RBI would be forced to cut interest rates in the near future, for if it does not, then the deluge of foreign exchange flows would lead to a corresponding increase in rupee circulation within the economy and thereby lead to higher inflation and still higher interest rates.
Politically too the government needs to show concern over inflation. Knowing for sure that while growth may not beget votes, inflation will surely lose them, a cautious approach is being adopted.
The results are out. “Curbing inflation remains the highest priority for the Reserve Bank of India.” Amidst heightened global uncertainty, the Governor of Reserve Bank of India, Yaga Venugopal Reddy, maintained status quo on all policy rates thereby avoiding any tit-for-tat interest rates cut after the Fed slashed rates by 75 basis points. It is an expected move as the government does not want to couple robust economic growth with high inflation. Considering the factors in the domestic & global economy, the move centring on liquidity, curtailing inflationary pressures & managing growth are very much in line. Banking analysts are of the view that RBI’s emphasis on price stability & well anchored inflation, ensures a monetary & interest rate environment, which is conducive to the continuation of the current growth momentum. They feel that maintaining status quo is indeed the best thing they could have done. However considering the rate differential, RBI would be forced to cut interest rates in the near future, for if it does not, then the deluge of foreign exchange flows would lead to a corresponding increase in rupee circulation within the economy and thereby lead to higher inflation and still higher interest rates.
Politically too the government needs to show concern over inflation. Knowing for sure that while growth may not beget votes, inflation will surely lose them, a cautious approach is being adopted.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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