Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Politics / News/  Expert View | Monetary policy is at an inflection point
BackBack

Expert View | Monetary policy is at an inflection point

Expert View | Monetary policy is at an inflection point

Tushar Poddar, vice-president (Asia Economics Research), Goldman SachsPremium

Tushar Poddar, vice-president (Asia Economics Research), Goldman Sachs
Tushar Poddar, vice-president (Asia Economics Research), Goldman Sachs

It is instructive to look at the reasons why RBI kept rates unchanged. First, there are ominous inflationary pressures due to elevated food and fuel prices, and high money growth. The winter crops of wheat and oilseeds have thus far been below expectations, and our analysis suggests that India may have to import these crops again this year. It is worth remembering that last year between January and April, inflation spiked up primarily due to elevated wheat and oilseed prices. High international oil prices are showing up in non-administered fuel oils such as naphtha. The increase in the fuel component of the wholesale price index has been the largest driver of inflation in recent weeks. Money supply growth remains very high. Between April and January, broad money has grown 22%—very high by historical standards. This will increasingly cause upward pressures on headline inflation.

Second, there is significant inertia in monetary policy. The last time RBI cut interest rates was in August 2003. Once it starts lowering rates, it will have to live with the consequences for, if inflation comes back again, the option of raising them becomes difficult. RBI would have to conclude that inflation is decisively under control before it starts cutting rates.

Third, inflation trumps other concerns in the policy paradigm. Growth doesn’t necessarily enable you to win elections, but inflation can certainly make you lose them. So, the preference of policymakers can be expected to remain hawkish on inflation.

The global downturn and impending US recession will make the macro environment increasingly challenging. India’s exports are likely to be hit significantly. Add to the mix rising fuel and commodity prices, and the output-inflation trade-off is worsening. In this setting, tighter fiscal policy would provide the much-needed space for RBI to ease interest rates, for fiscal policy remains expansionary due to off-budget liabilities on oil subsidies and spending pressures on programmes such as the National Rural Employment Guarantee Scheme. Plus, there are significant pressures on the horizon due to the sixth pay panel report and election-influenced spending.

Monetary policy should not be viewed in a vacuum, but in the overall policy milieu. By holding the line on interest rates and acknowledging the global headwinds to the Indian economy, RBI governor Y.V. Reddy has done his bit. Will the finance minister step up to the plate?

Tushar Poddar is vice-president (Asia Economics Research), Goldman Sachs.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Politics News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Published: 29 Jan 2008, 11:52 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App