It has been argued that the recent drop in the Index of Industrial Production in September is a cue for the Reserve Bank of India (RBI) to lower its policy rates.
It should not. While it is true that inflation has climbed down from the highs witnessed earlier, the bigger point is the time it has taken for RBI to tame inflation moderately. With weak monetary transmission mechanisms, it is easy to fuel inflation but far more difficult to bring it down.
Liquidity problems must be viewed in this context. There are other ways to address the issue instead of lowering the cost of borrowing. The latter leads almost immediately to demand-side pressures. In any case, the liquidity crunch has to do with a set of factors such as 3G or third-generation telecom service auctions, initial public offerings, tax payments and other transient episodes. These merit different policy interventions.