After prolonged synchronized growth during 2003-2007, we have the US, the European Union and Japan in synchronized contraction in 2009. Asset prices touched historic highs and then plunged to unprecedented lows, and have risen swiftly again.

The volatility of prices across asset classes—equities, currencies, metals, oil and many other commodities—has been extremely high in 2008 and continues to be so in 2009.

Policy response, though swift and timely, is also mimicking the ups and downs more frequently than otherwise. Conventionally, monetary policy is supposed to be effective with a time lag of one-two years. But in that time frame in these past two years, we have seen dramatic U-turns in monetary policy, from aggressive tightening to extreme accommodation and now tightening again—at least in Australia, and maybe soon in India.

Against this backdrop, the Reserve Bank of India (RBI) has done very well in ensuring a substantially dampened roller coaster ride for the Indian economy. It correctly identified that the economic woes of November to April were basically externally inflicted and did not indicate any great reduction of domestic growth impulses.

Hence we had a huge monetary stimulus of about Rs5.5 trillion, including unorthodox measures like lifelines to non-banking finance companies and mutual funds.

With such a fast pace of events and measures, it is difficult to say whether the central bank was reactive or proactive. That’s not because it wasn’t being articulate; it’s just that events were moving much too quickly.

Under RBI governor D. Subbarao, whose entry was a baptism by fire, the language called RBI-speak has been remarkably listener-friendly. This is once again reflected in the latest policy announcement as well as the accompanying macroeconomic review.

Industrial recovery is visible and not so nascent. Credit pickup is slower but improving. Sources other than banks are funding growth. The pace of decline of exports is less severe now. Not much to worry about foreign exchange management. But inflation is a very big concern.

Hence, the decision not to raise rates must have been tough, since consumer prices inflation has been in double digits for well over a year. Attributing this inflation to supply and not demand factors sounds like a sleight of words.

Just as asset inflation creeps into goods prices, so also food inflation will affect wages and overall inflation. Besides, inputs such as metals and oil are nearing old highs anyway.

RBI’s job is really about curbing inflationary expectations, not just food prices. This policy has the inflation red flag all over, but action on rate front has been postponed to the next quarter.

Most observers had predicted this, and the next rate hike, when it comes, will also be as expected. That’s the success of RBI-speak.

The transmission mechanism is clogged when it comes to credit flow to small-scale industries, but transmission of RBI’s message is going through very well.

Ajit Ranade is chief economist at the Aditya Birla Group. The views expressed here are his own.

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