Contradictory indications1 min read . Updated: 08 Jun 2010, 11:29 PM IST
Confusing economic signals from governments are capable of causing mayhem in the markets even at the best of times. When there is high uncertainty, this only creates more problems. This is avoidable. Yet, in the span of the past one week, finance minister Pranab Mukherjee and chief economic adviser Kaushik Basu have sent contradictory signals on monetary policy. This is something for the Reserve Bank of India (RBI) to decide and comments by ministers, and officials give rise to confusion.
Despite this uncertainty, Mukherjee chose to say what he did. His statement could be rationalized in view of the high inflation in India and the persistence of inflationary expectations, even as the economy powers ahead with an expected 7-8% annual growth rate.
Yet, curiously, within the next 24 hours, he advised these countries not to go in for a coordinated exit as such a step could stop economic recovery. Then, the next day, on 6 June, Basu said in an interview that RBI should not effect an increase in the cash reserve ratio (CRR). An increase in the CRR means that banks have to set aside more money as reserves. This means less money for lending and, in turn, less liquidity in the system. Basu also said inflationary fears were overplayed and that food inflation was the result of a base effect.
These statements only confuse the markets, especially the bond market, which is particularly sensitive to government statements about monetary and fiscal policies. At a time of strong economic growth, availability of money for investment and capacity expansion is important for checking inflation. Unfortunately, mixed policy signals add uncertainty to this process. If only for the sake of continued growth and inflation management, our policymakers should be more careful about what they say.
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