RBI monetry policy: A wise and significant pause - The Economic Times

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Sudeshna Sen Swaminathan S A Aiyar T K Arun T T Ram Mohan You are here: Home Opinion Columnists Mythili Bhusnurmath 19 DEC, 2011, 04.01AM IST, MYTHILI BHUSNURMATH,ET BUREAU
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RBI monetry policy: A wise and significant pause

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Read more on World Economic Outlook | reserve bank of india | RBI monetry policy | Pranab Mukherjee | INTERNATIONAL MONETARY FUND | Inflation

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The Reserve Bank of India (RBI) governor, D Subbarao, has been true to his word. In October 2011, while announcing the midyear review of the central bank's monetary policy, he assured us that "the projected inflation trajectory indicates that the inflation rate will begin falling in December 2011 and then continue down a steady path to 7% by March 2012... providing room for monetary policy to address growth risks in the short run." Consequently, "the likelihood of a rate action in the December midquarter review is relatively low. Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted." In keeping with that promise, the governor kept all policy rates unchanged in the RBI's mid-quarter review last Friday.
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In the process, he has turned a deaf ear to finance minister Pranab Mukherjee's not-so-subtle hint just two days before the mid-quarter review. Speaking at the Delhi Economics Conclave, the FM made no bones about where his preferences lay. "It is necessary for policymakers to send clear signals, mindful of the fact that options today are much more limited. India cannot afford to relax on its efforts to

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promote growth," Mukherjee said. The message was clear. It is time for a reordering of priorities. "Read my lips, cut rates," the FM seemed to urge the RBI governor. But the governor has chosen not to. Is he being dogmatic? Remember the beleaguered Margaret Thatcher's famous boast, "the lady's not for turning"? So, has the governor, likewise, dug in his heels when he should, perhaps, have been more 'flexible'? After all, by his own admission, "domestic growth is clearly decelerating, reflecting the combined impact of several factors: the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties." The answer is an emphatic 'no'. The reality is despite depressing index of industrial production (IIP) figures that show a 5.1% decline in industrial production in October 2011 and somewhat encouraging inflation numbers, the RBI cannot afford to relax its guard on inflation. True, food inflation, the most worrisome sort in a country like ours, is down to 4.35% for the week ended December 3, 2011. But what we gain on the food front is likely to be more than offset by a rise in the prices of manufactured articles and of fuel and power, thanks to the depreciating rupee and rising inflationary pressures worldwide. According to the International Monetary Fund's September 2011 World Economic Outlook, consumer price inflation is likely to rise from 1.6% in 2010 to 2.6% in 2011 in advanced economies, and from 6.1% to 7.5% in emerging and developing economies. In the Indian context, we have an additional problem. Our inflation numbers understate actual inflation since domestic prices of administered petroleum products do not reflect the full pass-through of global commodity prices. As under-recoveries of oil marketing companies increase, it is only a question of time before an increase in the price of administered petroleum products becomes inevitable.

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RBI monetry policy: A wise and significant pause - The Economic Times

http://economictimes.indiatimes.com/opinion/columnists/mythili-bhus...

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Truth Ms Mythili is India suffers from understatement of problems not knowing the likely snowballing effect likely to bounce. Parity front your exports are commensurate with import bills. in food front, artificial price rises are there due to tax elements. IIP side manufacturing really came down as the manufacturing companies mostly concentrate on making more money, in real estates and they ventured right and left and also displaced labor enormously. Now it is too late for them to get that labor overnight. Labor management is one of the most arduous task of labor intensive industry. Textiles, Agriculture are the biggest employers of labor but they successfully displaced the labor. So that labor has gone mostly in real estates and a lot either migrated to middle east or sought jobs there and in fact middle east is highly benefited while India lost its human power advantage. Middle East can afford to pay remuneration much better than India and in fact very less compared to payments in west. labor remuneration from middle East helped Indian labor to save thanks to its inherent frugality of the Indian labor. Agricultural sector finds it difficult to match to middle East and hence this sector lost that edge too. Truth is the major Indian employers lost their edge. They earlier maintained by providing that labor by colonies in textile sector and agriculture accommodation on the very lands but all such lands are made as money churners while the value of money just dwindled.

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RBI monetry policy: A wise and significant pause - The Economic Times

http://economictimes.indiatimes.com/opinion/columnists/mythili-bhus...

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