RBI targets inflation

RBI targets inflation
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First Published: Wed, Apr 30 2008. 01 03 AM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Wed, Apr 30 2008. 01 03 AM IST
There was a clear case for the Reserve Bank of India (RBI) to make a few more moves against resurgent inflation in its monetary policy for 2008-09. Rising prices seem to have fed inflationary expectations, though there is admittedly no way of knowing for sure in India. These expectations could lead to demands for higher wages in the future as people try to protect their real earnings from the ravages of inflation. And that, in turn, may start an inflationary spiral that could conceivably harm long-term economic growth. Getting the inflation rate down to 5% (if not lower) is clearly top priority.
Illustration: Jayachandran / Mint
The central bank had already decided on 17 April on a two-step increase in the cash reserve ratio (CRR), which is the proportion of bank deposits that have to be compulsorily placed with RBI.
Governor Y.V. Reddy announced on Tuesday that there will be a further 25 basis points jump in CRR. This will both restrict the ability of banks to lend and eat into their margins. The result could be higher interest rates for business and consumer loans and, hence, the demand for them.
Of course, lower credit growth and higher interest rates are not the only tools likely to be used in the fight against inflation. The government could continue to back this up with export restrictions and lower duties on imports. Another small appreciation of the rupee is not unlikely, though this is something where RBI will not reveal its hand in advance.
In this particular policy statement, the declarations of future intent are as important as the immediate changes in CRR. While there are the mandatory statements about supporting growth, maintaining financial stability and promoting financial inclusion, the main thrust of the typically long policy statement (79 pages, for the record) is on the problem of rising inflation.
One of the several criticisms against RBI is that it lacks clarity of purpose because it tries to shoot at too many moving targets at once. In its recent draft report, the Raghuram Rajan Committee on Financial Sector Reform has suggested that RBI should follow many other central banks and embrace inflation targeting as its primary goal. It is very unlikely that RBI is about to abandon its multiple goals and enshrine inflation control as its primary dharma.
But, for the moment, it does seem that inflation control has become its main concern — and with good reason.
Will RBI keep tightening monetary policy this year? Write to us at views@livemint.com
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First Published: Wed, Apr 30 2008. 01 03 AM IST