Another wrong turn

Wed, Oct 28 05:48 AM

Is the Reserve Bank of India reading its own projections? There seems to be every indication that its left hand doesn't seem to understand what its right hand is doing. In the survey of the state of the Indian economy that the RBI

released on the eve of the credit policy it came out with a gloomy forecast about India's growth path: it expected growth to be restricted to around 6 per cent for this financial year, which is considerably lower than the number that the government has put out as its official estimate. That is gloom in the real economy. Then there's the financial data that it has made public, which shows that credit growth continues slow. Indeed, the rate of credit growth, between 10 and 11 per cent, is much lower than it has been at comparable times of the season previously. There have been some optimistic numbers issued from various sources recently, certainly. But those are questionable when put in the right context; and, even if accepted uncritically, a single month of reasonable figures bang in the middle of a dozen months of gloom shouldn't signal a recovery to even the most optimistic of central bankers.

Yet the hard-headed numbers of the RBI seem to be completely ignored by the men at the top when it comes to the words and actions that they actually made public in the credit policy on Tuesday. In a shockingly disappointing approach, the RBI signalled that it simply didn't care about growth. Although the key policy rates were not directly tampered with, it hiked the "statutory liquidity ratio" or SLR by a percentage point; this is universally acknowledged as a clear signal of intent from the RBI to tighten monetary policy pretty soon.

This, is, simply put, an absurd direction in which to move. Of

major economies, India's should be the last central bank to even consider exiting post-crisis monetary easing, not the first, simply because the price of capital for enterprises here remains much higher than it should be. Yet the RBI — desperate for continued plaudits, perhaps, as brave contrarians? — is the first to dump concerns about growth. This is short-sighted economics, a decision taken in an opinion bubble that admits no countervailing view. Yes, it is not too late to signal a course correction, and to let India's entrepreneurs and households know that a high-growth path will return soon. But without basic reform in how monetary policy in this country is discussed and decided, expecting such reasonableness from the RBI is perhaps too much.

Inside News

Editor's picks