Even as events are moving thick and fast across the globe, a debate is raging in India on the urgent need to cut interest rates. This debate has even escalated into some sort of a verbal duel between the managers of the monetary affairs and political masters running the fiscal administration. Coming as they do ahead of the policy review by the Reserve Bank of India (RBI) on June 18, the ‘rate debate' has brought into sharp focus the considerable disquiet at all levels. The RBI has come to be portrayed as the prime culprit in ‘India slide' story. Just consider this: Between March 2010 and October 2011, it hiked key lending rates by a whopping 375 basis points. So much so, the country saw 13 successive rate increases. These ‘non-stop' hikes were justified on the ground that they were done to reign in the rising inflation. But, inflation still remains in the ‘discomfort zone'! GDP growth, in the meanwhile, has slumped to 5.3 per cent, the lowest rate in the last nine years. During the policy review in April, the RBI bowed to pressure and cut the key rates. While doing so, it surprised everybody by slashing the interest rate by 50 basis points. Two months on, the pressure has only mounted on the apex bank to further pare the rates. Top bosses at RBI aren't amused. They are clearly irritated at conscious efforts made by some quarters to make a villain out of RBI. “We are overplaying the interest rate aspect (for low growth),” said K. C. Chakrabarty, RBI Deputy Governor, at a SKOCH Summit in Mumbai on Friday last. He went on to add, “I don't know how much growth sacrifice is due to lack of productivity, lack of efficiencies and due to inflation.” Planning Commission Deputy Chairman Montek Singh Ahluwalia, however, is of the view that “monetary policy should be forward looking”, suggesting that a long-term view on rates will be more in order at this point in time.
The ‘wordy spat' suggests that the situation is turning serious as it is fluid. Understanding the drift and realising the sense of seriousness, Prime Minister Manmohan Singh went into a huddle with his key Cabinet members last week to set in motion a slew of measures to rev up infrastructure development projects with an estimated investment of Rs.2 lakh crore during the current fiscal. The objective is two-fold: to boost investment in the short-term and remove supply constraints in the long-run. The challenge, however, lies in mobilising funds of the gigantic scale that is needed. Can the government do it all alone? Doesn't it need help from the private sector? If so, is the atmosphere right for the private sector to come in a major way into these still-to-be-explored areas? No doubt, it requires right environment. On this score, the Government has not acquitted itself well if one were to go by some totally avoidable noises made by the members of the UPA Cabinet. If RBI is sought to be made a scapegoat for the low growth, the Centre is no less culpable in letting the situation drift. A policy paralysis is the last thing the country needs at a time when the world around is engulfed in a crisis. The problems of Greece and the happenings in Spain are bound to escalate local worries and compound the predicaments of the policy planners in India.
The deepening global crisis has even forced Beijing to act with alacrity. The Chinese Central Bank surprised the world with a 25 basis point cut in interest rate. This is the first time since the global financial crisis in 2008 that China has cut the interest rate. The China move has led Federal Reserve Chairman Ben Bernanke to declare that it would do whatever to protect the U.S. financial system and the economy.
It is against this backdrop that the ensuing policy review of Reserve Bank of India on June 18 has raised a huge expectation. It's time the monetary and fiscal authorities spoke a common language and get the country to stay away from the the quicksand.