Reserve Bank of India and the latest monetary policy

All those directly interested in the   Indian economy were eagerly waiting to see what the Governor of the Reserve bank of India Dr. Raghuram Rajan would do on Sept.  30, 2014.  It was the day when the RBI would announce its latest monetary policy.  The RBI would determine the lending policies of banks and also the quantum of money available for business activity. Ever since Dr. Raghuram Rajan became the Governor of the RBI, he maintained that he would be a tough anti-inflation fighter and that he would not swerve from this objective.

Pullarao Pentapati
Dr. Rajan had maintained this stance even now. In the last two months, there has been a visible change in the economy. The inflation rate was slowly coming down. There has been a   reduction in the fiscal deficit. Industrial activity has picked up. The business confidence had increased. Lastly, the internationally noted Rating agency “Standard & Poor”s” had improved the rating of India on Sept. 29, 2014.

He price of oil in the international market had come down from a high of US $ 115 per barrel to about 98 US $ a barrel. This reduction has been   un-precedented in the last two decades.  India gains immensely when oil price falls. As a matter of fact, experts estimated that in the last 90 days alone, the Government saved nearly 75,000 crores in reduced oil-related subsidies due to the fall in price of crude oil.

Despite such a positive scenario, Dr. Raghu Ram Rajan chooses not to change the existing monetary policies of the RBI. Everything remained the same as it was 6 months ago. Dr. Trajan said that he was not changing anything and increasing liquidity in the economy due to two important reasons.

a. Dr. Rajan said that the Indian economy might be negatively affected by the uncertain external situation, especially on the geopolitical front.

b. There is an increased risk of inflation due to potential food price shocks, since the monsoon was not fully satisfactory.

This meant that the RBI has kept key interest rates unchanged. Industry and the government have been clamoring of a cut in rates. Whatever the merits of the views of Dr. Rajan, there has been dis-appointment in industry circles and also the government.  The huge investments expected in the infra – structure and other sectors will definitely find obstacles in obtaining adequate credit.

The question is whether such credit limits will actually reduce inflation on food items and bring down the Consumer Price Index. Why did the price of vegetables go up steeply in the last 3 months? Was it merely due to supply-side problems or is there something else in the Indian economy, which is immune to the monetarist polices of the RBI?

Though Dr. Raghuram  Rajan is  a talented  scholar, he has to bear in mind  that there are 11 crore  un-employed educated youth in the country . Low-wage jobs or doles are not the answer.

The RBI should allow the government to create employment in industry and service sector. Perhaps the un-familiarity of Dr. Raghuram  Rajan with India is one major cause  of his hesitancy. We need a better craftsman at the RBI. Puzzlingly, Dr. Raghuram Rajan gives different reasons at different times for the same policy. That is of course logical .But it also means that the evolving situation does not have any impact on him. Are all the reasons with the same leverage or weight?

In December, 2013, Dr. Rajan gave some reasons on why he is not changing the RBI monetary policy. Then on Sept. 30, 2014, Dr. Rajan makes no reference to those reasons, but un-covers new reasons for continuing the same policy.  By this track record, one can safely assume that unless the inflation rate comes down sharply, there will be no change in RBI policy. Therefore, the RBI under Dr. Rajan has become entirely predictable.

By Pullarao Pentapati

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