FE Editorial : Strange debate

Mon, Oct 26 01:01 PM

It is hard to believe that much of the debate before RBI's credit policy statement on October 27 centres on whether rates should be hiked or not. Given the still perilous state of the global economy, the debate should still focus on whether rates should be cut or not. Put bluntly, it is still far too early to begin a serious debate on an exit strategy. That time will come, but likely not before the close of this financial year. And it is important to remember that even at that time, six months into the future, there may still be a need to carefully consider an exit strategy before rushing into it. For the moment, there is every indication that RBI will not raise any key policy rate—key figures in the government including the Prime Minister, finance minister and deputy chairman of the Planning Commission have said that India remains committed to continued stimulus. It is a commitment that India has made at a multilateral forum, the G-20, and it seems hard to imagine that RBI will decide to renege on commitments made by the government of India. But it isn't just about a political commitment. The economic scenario demands continued flexibility in monetary policy, especially because fiscal policy action has just about reached its upper limit.

Of course, we are unlikely to get back on to a 9% growth track any time soon. The world's biggest economies will take longer than we will to stage a recovery. However, to achieve 6.5-7% over the short term requires firm policy commitment. Evidence still suggests that credit growth is sluggish and corporate financing from bank lending is still anaemic. We aren't in any obvious credit-led or demand-led overheating type of situation. Of course, inflation is steadily inching upwards, but that is largely on account of a rise in food prices. Unfortunately, the government has been slow in its response to the somewhat deficient monsoon and the problems in food supply chains, but monetary policy can't settle food prices, at least not without inflicting huge damage on the rest of the economy. There is certainly a case for the government to look at ways to curb food inflation—faster imports of foodgrain and vegetables that are suffering from supply glitches should be expedited. There is still no case for RBI to worry itself about the inflation we are experiencing now. In the longer term, there will be some trade-off between growth and inflation, but given the importance of growth to an emerging economy like India, it would be better to lean on the side of monetary policy liberalism than conservatism, at least in the near term.

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